The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Federal Reserve Bank
OF DALLAS
W ILL IA M
H. WALLACE
DALLAS, TEXAS 7 5 2 2 2
FIRST V IC E PR ES ID EN T
AND CH IE F O PER ATING O FFIC ER
April 21, 1989
Circular 89-27
TO:
The Chief Operations Officer of
all financial institutions in the
Eleventh Federal Reserve District
SUBJECT
Delayed disbursement o f t e l l e r ' s checks and cash ier's checks
DETAILS
The Federal Reserve Board of Governors has issued a policy statement
regarding the delayed disbursement of teller's checks and cashier's checks
consistent with the purpose of the Expedited Funds Availability Act. The
statement addresses abuses of delayed disbursement that may give rise to check
float while allowing for legitimate centralized teller's check services.
Delayed disbursement is the practice of issuing checks that are
payable by a bank located in a geographic area such that collection of the
checks is generally delayed. This practice increases the time and cost for a
bank to collect the checks. The effects of delayed disbursement are
particularly significant in the case of teller's checks and cashier's checks,
which must be given next-day availability under the Expedited Funds
Availability Act and Regulation CC.
Major providers of teller's and cashier’s checks have indicated to
that Board that they are willing to make operational changes to speed the
collection of checks in the markets they serve. The Board will monitor
adherence to the policy and delayed disbursement practices in general and, if
necessary, may reconsider whether formal regulatory action may be warranted.
ATTACHMENTS
The Board's policy statement is attached.
For additional copies of any circular please contact the Public A ffairs D epartm ent at (214) 651 -6 2 8 9 . Banks and others are
encouraged to use the following in coming W A TS numbers in contacting this Bank (800) 4 4 2 -7 1 4 0 (intrastate) and (800)
5 2 7 -9 2 0 0 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
-
2
-
MORE INFORMATION
For further information, please contact Robert L. Whitman, (214)
698-4357 at the Dallas Office, Robert W. Schultz, (915) 544 4730 at the El
Paso Branch, Luke E. Richards, (713) 652-1544 at the Houston Branch, or John
A. Bullock, (512) 224-2141 at the San Antonio Branch.
Sincerely yours,
FEDERAL RESERVE SYSTEM
12 CFR Part 229
[Docket No. R-0639]
Policy Statement —
Delayed Disbursement of
Teller's Checks and Cashier's Checks
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Policy Statement.
SUMMARY:
The Board is issuing a policy statement regarding the
delayed disbursement of teller's checks and cashier's checks
consistent with the purpose of the Expedited Funds Availability
Act. The
policy statement is intended to address abuses
delayeddisbursement that may
of
give rise to check floatwhile
allowing for legitimate centralized teller's check services.
EFFECTIVE DATE:
April 10, 1989.
FOR FURTHER INFORMATION CONTACT:
Louise L. Roseman, Assistant
Director (202/452-3874), or Gayle Thompson, Program Leader
(202/452-2934), Division of Federal Reserve Bank Operations;
Oliver Ireland, Associate General Counsel (202/452-3625), or
Stephanie Martin, Attorney (202/452-3198), Legal Division; for
the hearing impaired only:
Telecommunications Device for the
Deaf, Earnestine Hill or Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
The Delayed Disbursement Problem
Delayed disbursement is the practice of issuing checks
-
2
-
that are payable by, through, or at a bank1' located in a
geographic area such that collection of the checks is generally
delayed.
In addition to increasing the time for the collection
and return of a check, delayed disbursement often increases the
costs to process and transport the check.
Delayed disbursement
practices not only reduce the efficiency of the check collection
system, but may also increase the risk to the depositary bank
because the delay may result in a check being returned after
funds must be made available for withdrawal under the Expedited
Funds Availability Act ("Act") and the Board's Regulation CC (12
CFR Part 229).
Delayed Disbursement of Teller's Checks
Although many classes of checks are subject to delayed
disbursement, the effects of delayed disbursement are
particularly significant in the case of teller's checks17.
Many
banks issue teller's checks in lieu of cashier's checks (i.e.,
checks a bank draws on itself).
These banks believe that, due to
^Regulation CC defines "bank" to include all depository
institutions, including commercial banks, savings and loan
associations, and credit unions. A depositary bank is defined as
the first bank to which a check is transferred. A paying bank is
a bank by, at, or through which a check is payable and to which
it is sent for collection.
-'Regulation CC defines a "teller's check" as a check
provided to a customer of a bank, or acguired from a bank for
remittance purposes, that is drawn by the bank and drawn on
another bank or payable through or at another bank. For the
purposes of the proposed amendments to Regulation CC as well as
this policy statement, "teller's check" includes checks drawn on
a Federal Reserve Bank or a Federal Home Loan Bank. Regulation
CC defines "cashier's check" as a check provided to a customer of
a bank, or acquired from a bank for remittance purposes, that is
drawn on the bank, is signed by an officer or employee of the
bank on behalf of the bank as drawer, and is a direct obligation
of the bank.
-
3
-
specialization and economies of scale, certain banks and other
service providers can perform the tracking, reconciliation, and
payment of teller's checks at a lower cost than the issuing bank
would incur by issuing and paying cashier's checks.
In addition,
in certain cases, based on the location of the paying bank vis-avis the issuing bank17, the issuing bank can accrue float
benefits from the delayed disbursement of these checks.-7
The Act requires a depositary bank to provide customers
with next-day availability, under specified conditions, for
certain checks, including cashier's checks and teller's checks,
deposited in transaction accounts.
Regulation CC extends this
next-day availability requirement to checks drawn on Federal
Reserve Banks and Federal Home Loan Banks, because these checks
have a low risk of return and are often used as a substitute for
teller's checks.
Depending on the location of the paying bank, a
depositary bank may not receive credit for the check by the time
funds must be made available to the customer for withdrawal.
Thus, the practice of delayed disbursement permits a bank issuing
such checks to impose costs, in terms of lost interest, on other
17Based on a recent Federal Reserve Bank survey, staff
estimates that approximately 60 to 80 percent of teller's and
cashier's checks are deposited in a bank that is located in the
same state as the issuing bank. Thus, when banks issue teller's
checks that are payable at a location distant from the issuing
bank, the depositary bank is also generally distant from the
paying bank.
-7In some cases, the issuing bank does not remit funds to
the paying bank until the day of presentment. In other cases,
the issuing bank remits funds to the paying bank before the check
is presented. Such funds may be held in a compensating balance
account by the paying bank until the check is presented for
payment. Earnings from the compensating balance account may be
used to offset fees for teller's check services.
-
4
-
banks and to benefit from interest or earnings credits earned on
outstanding checks until the checks are presented for collection.
Previous Board Actions
Prior to enactment of the Act, the Board's ability to
address delayed disbursement abuses was limited to discouraging
such practices through policy statements-7 and Federal Reserve
Bank services, such as the High-Dollar Group Sort program.
The
Act authorizes the Board to make improvements to the check system
to speed the collection and return of checks and, thus, to
restrict delayed disbursement practices.
Specifically, the Act
gives the Board "the responsibility to regulate any aspect of the
payment system, including the receipt, payment, collection, or
clearing of checks; and any related function of the payment
system with respect to checks" (12 U.S.C. 4008(c)(1)).
The Act
also evidences the Congress' intent to speed the availability of
funds to bank depositors and, thus, suggests that a reevaluation
of delayed disbursement practices is appropriate.
In December 1987, the Board requested public comment on
proposed Regulation CC as well as on proposals for long-term
improvements to the check collection system (52 FR 47176,
December 11, 1987).
A number of commenters on proposed
Regulation CC cited the inequity of requiring the depositary bank
to make the proceeds of certain checks, including teller's
checks, available for withdrawal on the business day after
deposit if the bank cannot receive credit for the checks by that
time.
Some commenters recommended that the Board restrict the
-7See policy statements issued by the Board on January 11,
1979 and February 23, 1984.
-
5
-
next-day availability requirement to checks for which the
depositary bank can receive credit by the next business day.
Such a restriction, however, would be inconsistent with the Act.
With respect to longer term improvement in the check
collection system, the Board requested comment on how to address
delayed disbursement practices and the practice of issuing
teller's checks payable in a different check processing region
than that of the issuing bank.
The majority of comments that
addressed this issue indicated that the practice of issuing
teller's checks payable in a different check processing region
should be eliminated.
Several other commenters (primarily
providers of teller's check services) opposed any regulatory
action to limit the location of the paying bank.
After an analysis of the comments, the Board issued for
comment in June 1988 a proposed amendment to Regulation CC to
restrict certain delayed disbursement practices, with a proposed
effective date of April 1, 1989 (53 FR 24093, June 27, 1988).
Under the proposal, a bank that issued teller's checks would be
required to draw the checks on or designate the checks payable
through or at a bank such that a depositary bank located in the
same community as the issuing bank would generally receive credit
for the check as quickly as it would receive credit on a check
drawn on the issuing bank.
This proposed "equivalent availability" rule was based
on the actual check collection practices of banks in the issuing
bank's community.
The Board did not believe it was practical to
address the cases in which teller's checks are deposited in banks
distant from the issuing bank, such that the depositary banks are
-
6
-
unable to receive next-day credit for the checks, even though the
depositary banks must make the funds available for withdrawal on
the next business day.
For those checks deposited in a bank
local to the issuing bank, the proposed rule was designed to
ensure that depositary banks generally would receive credit for
the teller's check by the next business day, when the funds must
be made available for withdrawal.
Public Comment On Delayed Disbursement Proposal
The Board received over 230 written comments from the
public, and Board staff held numerous informal conversations with
industry representatives regarding the effects of the proposal.
Over 75 percent of the commenters supported the Board's objective
to restrict the delayed disbursement of teller's checks; however,
commenters indicated that the proposed rule was unclear and would
be difficult to administer.
Commenters expressed particular
concerns about how issuers of teller's checks and providers of
teller's check services could determine whether banks in a given
community collected checks such that the availability of the
teller's checks would be equivalent to the availability the banks
receive on checks drawn on the issuing bank.
As an alternative to the proposal, some commenters
suggested that a cutoff hour, such as a Federal Reserve deposit
deadline, be established such that a check deposited by the
depositary bank for collection at or after the cutoff hour would
receive next-day credit.
Several commenters indicated that a
combination of Federal Reserve and correspondent deadlines should
be referenced to determine whether an issuing bank could issue
teller's checks of a particular service provider.
Other
-
7
-
commenters suggested that the delayed disbursement problem could
be resolved, in large part, by requiring that teller's checks be
payable locally, or be encoded with a city routing number if
payable nonlocally
The Board has reviewed the public comments received and
has evaluated alternative methods of dealing with the delayed
disbursement of teller's checks.
It has considered the costs of
delayed disbursement on depositary banks and the burdens on users
of teller's check services that might occur should the Board take
regulatory action.
The Board believes that by issuing a policy
statement it can avoid the rigidity of a regulation and still
address the problem of intentional delay in the collection of
teller's checks.
The effectiveness of the policy statement,
however, will depend on the cooperation of teller's check issuers
and service providers.
Discussions with the major providers of
teller's check services indicated that they are willing to make
changes that would speed the collection of checks in markets they
serve.
The Board has received commitments from a number of major
teller's check providers to make operational changes that would
address in large part the concerns that prompted the Board to
propose amendments to Regulation CC to restrict the delayed
disbursement of these checks.
-'Commenters also expressed concern regarding the proposed
effective date of April 1, 1989. Commenters indicated that the
proposed rule would require many banks to replace existing
teller's check stock or to change providers of teller's check
services, thereby necessitating alonger lead time than that
provided in the proposal. In response to these comments, the
Board issued a notice that should the Board adopt a rule
restricting the delayed disbursement of teller's checks, such a
rule would not be effective April 1, 1989, as published in the
proposal.
(54 FR 5495, February 3, 1989).
-
8
-
The Board favors cooperative solutions that do not
require rigid regulations and that demonstrate the industry's
willingness to work toward payment system improvements.
Therefore, the Board is issuing a policy statement in lieu of
adopting a final regulation restricting delayed disbursement
practices.
The effectiveness of the policy statement, however,
will depend on the cooperation of teller's check service
providers and issuers of teller's checks.
The policy statement
will be effective immediately, but the Board recognizes that many
banks and service providers will need a longer lead time to
comply with the policy.
The Board will monitor the industry's
adherence to the policy statement and delayed disbursement
practices in general and, should abuses continue, will consider
formal regulatory action.
In light of the foregoing, the Board is issuing the
following policy statement:
Board Policy Statement on Delayed Disbursement
of Teller's Checks and Cashier's Checks
Delayed disbursement is the practice of issuing checks
that are payable by, through, or at a bank17 located in a
geographic area such that collection of the checks is generally
delayed.
Although many classes of checks are subject to delayed
disbursement, the effects of delayed disbursement are
^Regulation CC defines "bank" to include all depository
institutions, including commercial banks, savings and loan
associations, and credit unions. A depositary bank is defined as
the first bank to which a check is transferred. A paying bank is
a bank by, at, or through which a check is payable and to which
it is sent for collection.
-
9
-
particularly significant in the case of teller's checks-'.
The
delayed disbursement of teller's checks imposes float costs on
the depositary bank, which must generally make the proceeds of
these checks available for withdrawal on the business day
following deposit.
In addition, delayed disbursement often
increases the costs to process and transport these checks.
The Expedited Funds Availability Act ("Act") and
Regulation CC (12 CFR Part 229) require a depositary bank to
provide customers with next-day availability, under specified
conditions, for certain checks deposited in transaction accounts,
including cashier's checks1' and teller's checks.
Depending on
the location of the paying bank, a depositary bank may not
receive credit for the check by the time funds must be made
available to the customer for withdrawal.
Thus, the practice of
delayed disbursement permits a bank issuing such checks to impose
costs, in terms of lost interest, on other banks and to benefit
from interest or earnings credits earned on outstanding checks
until the checks are presented for payment.
The Board recognizes that many banks that issue
teller's checks benefit from the specialization and economies of
-'Regulation CC defines a "teller's check" as a check
provided to a customer of a bank, or acquired from a bank for
remittance purposes, that is drawn by the bank and drawn on
another bank or payable through or at another bank. For the
purposes of this policy statement, "teller's check" includes
checks drawn on a Federal Reserve Bank or a Federal Home Loan
Bank.
^Regulation CC defines "cashier's check" as a check
provided to a customer of a bank, or acquired from a bank for
remittance purposes, that is drawn on the bank, is signed by an
officer or employee of the bank on behalf of the bank as drawer,
and is a direct obligation of the bank.
-
10
-
scale of certain banks and other service providers that can
perforin the tracking, reconciliation, and payment services
associated with teller's checks at a lower cost than the issuing
bank would incur by issuing and paying cashier's checks.
In
addressing the delayed disbursement problem, the Board believes
that it is desirable to reduce the float created by the issuance
of these checks while at the same time minimize the disruption of
efficient teller's check services.
As a general matter, the Board believes that a
depositary bank located in the same community as the bank that
issues a teller's check should be able to receive next-day credit
for the teller's check.
The Board has determined, after review
of Federal Reserve collection patterns and deposit deadlines
across the country, that depositary banks in most areas generally
can receive next-day credit for checks that are encoded with a
nonlocal city routing number*7 and presented in a nonlocal
Federal Reserve city.
For checks that are encoded with a
nonlocal RCPC or country routing number and presented in a
nonlocal check processing region, credit is generally deferred by
one or two days.
The Board recognizes, however, that depositary
banks located on the west coast generally may not be able to
receive next-day availability for checks presented in most
nonlocal cities.
In addition, in other isolated areas of the
i;These checks are payable by banks located in the same city
as a Federal Reserve office. RCPC ("Regional Check Processing
Center") checks are payable by banks in areas designated within
the territories of Federal Reserve offices but outside Federal
Reserve cities. Certain Federal Reserve regions also contain
country zones, which are generally more remote from Federal
Reserve cities than are RCPC zones.
-
11
-
country, next-day credit is generally not available for any check
payable by a nonlocal paying bank.
The Board recognizes that
banks in these areas may benefit by having access to a
centralized teller's check service provider.
The Board believes that banks issuing teller's checks
and teller's check service providers should take steps to ensure
that delays in the collection and return of teller's checks are
kept to a minimum.
First, the Board believes that any
disbursement practice designed to extend the time needed to
collect a teller's check is inappropriate.
Although the Board
believes that centralized disbursement is economically efficient
in some cases, the location of the paying bank should be chosen
so as to minimize collection time.
Second, the Board has determined that depositary banks
can generally receive credit faster for checks payable by a bank
with a city routing number than for checks payable by a bank with
an RCPC or country routing number.
The Board believes that
teller's check service providers that serve issuing banks in
check processing regions that are nonlocal to the paying bank
should help speed the collection and return of teller's checks by
use of a city presentment point and a city routing number in the
MICR line of its teller's checks.
Some teller's check service providers confine the scope
of their services to a state or other limited geographic area.
Because the state or area may be divided into more than one check
processing region, such service providers may use a paying bank
that is nonlocal to many of their customer banks.
In addition,
the state or area may contain no Federal Reserve city.
The Board
-
12
-
recognizes that it may be impractical for such service providers
to use a city presentment point.
Third, the Board believes that those teller's check
service providers that serve banks nationwide should accept
teller's checks at more than one presentment point, particularly
those providers that serve west coast banks.
For example, a
teller's check service provider that uses an east coast paying
bank could shorten collection and return times for its California
customers by also providing a west coast presentment point for
teller's checks.
The Board recognizes that similar delayed disbursement
problems arise in connection with cashier's checks, issued by a
bank with multistate branches, that depositary banks must send to
a central location for payment.
The Board believes that the same
general guidelines should apply to the disbursement of cashier's
checks as apply to teller's checks and will take further action
regarding cashier's checks should abusive delayed disbursement
practices continue to occur.
The Board will monitor the industry's adherence to the
policy statement and delayed disbursement practices in general
and, should abuses continue, will consider formal regulatory
action.
By order of the Board of Governors of the Federal
Reserve System, March 31, 1989.
(signed) William W. Wiles
William W. Wiles
Secretary of the Board
FEDERAL RESERVE BANK OF DALLAS
STATION K
DALLAS, TEXAS 7 5 2 2 2
FIRST CLASS
U.S. POSTAGE
PAID
Dallas, Texas
Permit No. 8080
@FedFRASER