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Federal Reserve Bank of Dallas
2200 N. PEARL ST.
DALLAS, TX 75201-2272

December 1, 2005
Notice 05-75

TO: The Chief Operating Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

SUBJECT
Final Rule Governing Remotely Created Checks
DETAILS
The Board of Governors has adopted a final rule amending Regulation CC (Funds Transfers
Through Fedwire and Availability of Funds and Collection of Checks) to define “remotely created
checks” and to create transfer and presentment warranties for such checks. The purpose of the
amendments is to shift liability for unauthorized remotely created checks to the depositary bank,
which is generally the bank for the person that initially created and deposited the remotely created
check. The Board has also adopted conforming cross-references to the new warranties in Regulation J
(Collection of Checks and Other Items by Federal Reserve Banks).
The amendments will become effective July 1, 2006.
ATTACHMENT
A copy of the Board’s notice as it appears on pages 71218–26, Vol. 70, No. 227 of the Federal
Register dated November 28, 2005, is attached.
MORE INFORMATION
For more information, please contact Don Jackson, Payments Services Department, (214) 9225431. Previous Federal Reserve Bank notices are available on our web site at www.dallasfed.org/
banking/notices/index.html or by contacting the Public Affairs Department at (214) 922-5254.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

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Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations
FEDERAL RESERVE SYSTEM
12 CFR Parts 210 and 229
[Regulations J and CC; Docket No. R–1226]

Collection of Checks and Other Items
by Federal Reserve Banks and Funds
Transfers Through Fedwire and
Availability of Funds and Collection of
Checks
Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
AGENCY:

SUMMARY: The Board of Governors is
adopting a final rule amending
Regulation CC to define ‘‘remotely
created checks’’ and to create transfer
and presentment warranties for such
checks. The purpose of the amendments
is to shift liability for unauthorized
remotely created checks to the
depositary bank, which is generally the
bank for the person that initially created
and deposited the remotely created
check. The Board is also adopting
conforming cross-references to the new
warranties in Regulation J.
EFFECTIVE DATE: July 1, 2006.
FOR FURTHER INFORMATION CONTACT:
Adrianne G. Threatt, Counsel (202–452–
3554), or Joshua H. Kaplan, Attorney,
(202–452–2249), Legal Division; or Jack
K. Walton, II, Associate Director (202–
452–2660), or Joseph P. Baressi, Senior
Financial Services Analyst (202–452–
3959), Division of Reserve Bank
Operations and Payment Systems; for
users of Telecommunication Devices for
the Deaf (TDD) only, contact 202–263–
4869.
SUPPLEMENTARY INFORMATION:

Background
Existing Law and the Board’s Proposed
Rule
‘‘Remotely created checks’’ typically
are created when the holder of a
checking account authorizes a payee to
draw a check on that account but does
not actually sign the check.1 In place of
the signature of the account-holder, the
remotely created check generally bears a
statement that the customer authorized
the check or bears the customer’s
printed or typed name. Remotely
created checks can be useful payment
devices. For example, a debtor can
authorize a credit card company to
create a remotely created check by
telephone, which may enable the debtor
to pay his credit card bill in a timely
1 There is no commonly accepted term for these
items. The terms ‘‘remotely created check,’’
‘‘telecheck,’’ ‘‘preauthorized drafts,’’ and ‘‘paper
draft’’ are among the terms that describe these
items.

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Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations
manner and avoid late charges.
Similarly, a person who does not have
a credit card or debit card can purchase
an item from a telemarketer by
authorizing the seller to create a
remotely created check.
On the other hand, remotely created
checks are vulnerable to fraud because
they do not bear the drawer’s signature
or other readily verifiable indication of
authorization. Because remotely created
checks are cleared in the same manner
as other checks, it is difficult to measure
the use of remotely created checks
relative to other types of checks.
However, there have been significant
consumer and bank complaints
identifying cases of alleged fraud using
remotely created checks.
Existing Law on Remotely Created
Checks
A remotely created check is subject to
state law on negotiable instruments,
specifically Articles 3 and 4 of the
Uniform Commercial Code (U.C.C.) as
adopted in each state. Under the U.C.C.,
a bank that pays a check drawn on the
account of one of its customers may
charge a customer’s account for a check
only if the check is properly payable. A
bank generally must recredit its
customer’s account for the amount of
any unauthorized check it pays.2 This
obligation is subject to limited
defenses.3 In addition, the paying bank
may obtain evidence that the depositor
did in fact authorize the check and is
seeking to reverse the authorization.
Under such circumstances, the paying
bank would not be obligated to recredit
its customer for the amount of the
check.4
A paying bank may, until midnight of
the banking day after a check has been
presented to the bank, return the check
to the bank at which the check was
deposited if, among other things, the
paying bank believes the check is
unauthorized. Once its midnight
deadline has passed, the paying bank
generally cannot return an unauthorized
check to the depositary bank.5
2 U.C.C.

4–401.
example, the paying bank may be able to
assert that the customer failed to notify the bank of
the unauthorized item with ‘‘reasonable
promptness’’ (U.C.C. 4–406(c) and (d)).
4 The FTC’s Telemarketing Sales Rule prohibits a
telemarketer from issuing a remotely created check
on a consumer’s deposit account without the
consumer’s express verifiable authorization. The
authorization is deemed verifiable if it is in writing,
tape recorded and made available to the consumer’s
bank upon request, or confirmed by a writing sent
to the consumer prior to submitting the check for
payment. 6 CFR part 310.
5 See U.C.C. 4–301 and 4–302. In limited cases,
the paying bank may be able to recover from the
presenting bank the amount of a check that it paid
under the mistaken belief that the signature of the
3 For

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The provisions of the U.C.C. cited
above implement the rule set forth in
the seminal case of Price v. Neal,6
which held that drawees of checks and
other drafts must bear the economic loss
when the instruments they pay are not
properly payable because the drawer
did not authorize the item.7 Under the
Price v. Neal rule, the paying bank must
bear the economic loss of an
unauthorized check with little recourse
other than bringing an action against the
person that created the unauthorized
item. This rule currently applies to all
checks, including remotely created
checks, in a majority of states.
The policy rationale for the Price v.
Neal rule is that the paying bank, rather
than the depositary bank, is in the best
position to judge whether the signature
on a check is the authorized signature
of its customer. Remotely created
checks, however, do not bear a
handwritten signature of the drawer that
can be verified against a signature card.
In most cases, the only means by which
a paying bank could determine whether
a remotely created check is
unauthorized and return it in a timely
manner would be to contact the
customer before the midnight deadline
passes. However, before a paying bank
can verify the authenticity of remotely
created checks, it first must identify
remotely created checks drawn on its
accounts. Because there is no code or
feature on remotely created checks that
would enable a paying bank to identify
them reliably in an automated manner,
remotely created checks rarely come to
the attention of paying banks until a
customer identifies the check as
unauthorized, usually well after the
midnight deadline.
Recent Legal Changes to Address
Remotely Created Checks
Amendments to the U.C.C.
In recognition of the particular
problems presented by remotely created
checks, the National Conference of
Commissioners on Uniform State Laws
and the American Law Institute in 2002
approved revisions to Articles 3 and 4
of the U.C.C. that specifically address
remotely created checks. The U.C.C.
revisions define a remotely created
check (using the term ‘‘remotely-created
consumer item’’) as ‘‘an item drawn on
a consumer account, which is not
created by the paying bank and does not
drawer of the draft was authorized. This remedy,
however, may not be asserted against a person that
took the check in good faith and for value or that
in good faith changed position in reliance on the
payment or acceptance. U.C.C. 3–418(a) and (c).
6 97 Eng. Rep. 871 (K.B. 1762).
7 See also Interbank of New York v. Fleet Bank,
730 NYS 2d 208 (2001).

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71219

bear a hand written signature purporting
to be the signature of the drawer.’’ 8 The
U.C.C. revisions require a person that
transfers a remotely-created consumer
item to warrant that the person on
whose account the item is drawn
authorized the issuance of the item in
the amount for which the item is
drawn.9 Accordingly, the U.C.C. alters
the Price v. Neal rule for remotelycreated consumer items by shifting
liability for those items to the
transferors.10
These revisions rest on the premise
that it is appropriate to shift the burden
of ensuring authorization of a remotely
created check to the bank whose
customer deposited the remotely created
check because this bank is in the best
position to detect the fraud.11 The
U.C.C. warranty provides an economic
incentive for the depositary bank to
monitor customers that deposit remotely
created checks and, therefore, should
have the effect of limiting the quantity
of unauthorized remotely created checks
that are introduced into the check
collection system.
Amendments to State Laws
Fewer than half the states in the U.S.
have amended their Articles 3 and 4 to
include provisions to address remotely
created checks.12 Among the states that
have made such amendments, the
definitions and warranties are not
uniform in their scope or requirements.
In addition to the state codes, some
check clearinghouses have adopted
warranties that apply to remotely
created checks that are collected
through these clearinghouses. The stateby-state approach to the adoption of
remotely created check warranties
complicates the determination of
liability for remotely created checks
collected across state lines, because the
bank that presents a check may not be
8 U.C.C.

3–103(16).
3–416(a). A person that transfers a
remotely-created consumer item for consideration
warrants to the transferee and, if the transfer is by
indorsement, to any subsequent transferee, that the
person on whose account the item is drawn
authorized the issuance of the item in the amount
for which the item is drawn. See also U.C.C. 4–
207(a)(6), 3–417(a)(4), 4–208(a)(4).
10 For items other than remotely-created
consumer items, the transferor must warrant only
that it has ‘‘no knowledge’’ that the instrument is
unauthorized. U.C.C. 3–417(a)(3).
11 U.C.C. 3–416, Official Comment, paragraph 8.
The Official Comment notes that the provision
supplements the FTC’s Telemarketing Sales Rule,
which requires telemarketers to obtain the
customer’s ‘‘express verifiable authorization.’’
12 Those states include Arkansas, California,
Colorado, Hawaii, Idaho, Iowa, Maine, Missouri,
Minnesota, Nebraska, New Hampshire, North
Dakota, Oregon, Tennessee, Texas, Utah, Vermont,
West Virginia, and Wisconsin.
9 U.C.C.

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subject to the same rules as the paying
bank.
Proposed Rule
On March 4, 2005, the Board
published for comment a proposal to
amend Regulation CC to provide
transfer and presentment warranties for
remotely created checks.13 This
proposal was issued pursuant to the
Expedited Funds Availability Act (the
EFA Act), Pub. L. 100–86, 101 Stat. 635
(codified at 12 U.S.C. 4001 et seq.),
which authorizes the Board to establish
rules allocating losses and liability
among depository institutions ‘‘in
connection with any aspect of the
payment system.’’ 14 As noted above, the
check collection and return system
operates nationally. As a result, in order
for the remotely created check
warranties to be effective they must
apply uniformly and nationwide.
The Board proposed to define a
‘‘remotely created check’’ as a check
that is drawn on a customer account at
a bank, is created by the payee, and does
not bear a signature in the format agreed
to by the paying bank and the customer.
Unlike the U.C.C. amendments, the
Board’s proposed definition would
apply to remotely created checks drawn
on both consumer and non-consumer
accounts.
The Board proposed to create transfer
and presentment warranties that would
apply to remotely created checks that
are transferred or presented by banks to
other banks. Under the proposed
warranties, any transferor bank,
collecting bank, or presenting bank
would warrant that the remotely created
check that it is transferring or presenting
is authorized according to all of its
terms by the person on whose account
the check is drawn. The proposed
warranties would apply only to banks
and ultimately would shift liability for
the loss created by an unauthorized
remotely created check to the depositary
bank. A paying bank would not be able
to assert a warranty claim under the
Board’s proposed rule directly against a
nonbank payee that created or
transferred an unauthorized remotely
created check.
13 70

FR 10509.
Board is authorized to impose on or
allocate among depository institutions the risks of
loss and liability in connection with 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. Such liability may not exceed the amount
of the check giving rise to the loss or liability, and,
where there is bad faith, other damages, if any,
suffered as a proximate consequence of any act or
omission giving rise to the loss or liability. 12
U.S.C. 4010(f).
14 The

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General Comments
The Board received over 250
comments on the proposed rule from
depository institutions of various sizes,
trade associations that represent
depository institutions, state attorneys
general, individuals, academics,
consumer representatives, the
Permanent Editorial Board of the U.C.C.,
and Reserve Banks. This section
presents an overview of the central
points contained in the comments that
the Board received. The section-bysection analysis of the final rule, set
forth below, discusses the comments in
greater detail and responds to specific
concerns regarding the definition of
remotely created check and the scope of
the warranties.
The commenters provided
overwhelming support for the proposed
rule, although many suggested that the
Board make specific revisions in the
final rule. The Board received many
comments in favor of the proposal from
small depository institutions, many of
which noted that they regularly suffer
losses as the result of unwittingly
paying remotely created checks that
customers later identify as
unauthorized. Large depository
institutions and their trade associations
also strongly supported the proposal
and specifically addressed a number of
important issues discussed below.
Only one depository institution
opposed the proposal in its entirety,
arguing that there is no factual predicate
for the proposed rule because paying
banks do not verify the authenticity of
customer signatures on any checks. The
Board believes that many banks do
examine signatures on some subset of
checks. Nevertheless, given that
remotely created checks do not bear a
verifiable mark of authentication, the
depositary bank is in a better position to
prevent the introduction of
unauthorized remotely created checks
into the check collection process by
acquainting itself with the business
practices of its customers who routinely
deposit such checks. The purpose of the
Board’s rule is to create an economic
incentive for depositary banks to
perform the requisite due diligence on
their customers by shifting liability for
unauthorized remotely created checks to
the depositary bank.
Some commenters, including
Attorneys General representing 35
states, recommended that the Board
prohibit the use of remotely created
checks altogether, arguing principally
that legitimate use of remotely created
checks has significantly declined,
largely as a result of new automated
clearing house (ACH) payment

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applications that can be used in place of
remotely created checks. Several
commenters, however, reported an
increase in the use of the remotely
created checks (albeit some noting that
this increase in use has been
accompanied by a commensurate
increase in unauthorized remotely
created checks). The Board believes that
substantial additional research would be
required about the uses of remotely
created checks and the commercial
impact of an outright ban before a
prohibition by statute or regulation
could be justified. The Board believes
its rule provides effective protections
against unauthorized remotely created
checks while still allowing for the
legitimate use of those checks.
Some commenters argued that
remotely created checks also should be
covered by the Board’s Regulation E (12
CFR Part 205), because payments by
remotely created check are in fact
electronic fund transfers subject to the
Electronic Funds Transfer Act (EFTA),
which, among other things, requires
certain disclosures related to transfers
covered by the Act.15 Under the EFTA,
the term ‘‘electronic fund transfer’’
includes any transfer of funds, other
than a transaction originated by check,
draft, or similar paper instrument.16
Therefore, as a general matter, the EFTA
does not apply to funds transferred from
a consumer’s account by means of a
check. The commenters argued that a
remotely created check is initiated by an
electronic communication between the
consumer and a third party and not by
a check or similar paper instrument.
Further clarification of the applicability
of the EFTA to check transactions that
are authorized on-line or by telephone
must be made within the context of
Regulation E. The Board will continue
to monitor developments to determine
whether further action is appropriate.
Extension of the Midnight Deadline
The Board invited comment on
whether a different approach to address
the risks of remotely created checks
would be appropriate. One alternative
on which the Board requested comment
was whether the Board should extend
the U.C.C. midnight deadline for paying
banks that return unauthorized remotely
created checks to give the paying bank
more time to determine whether a
particular check was authorized. Some
commenters favored the approach
because it would mirror the ACH rules
set forth by the National Automated
Clearing House Association for
unauthorized ACH debits, while others
15 15
16 15

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U.S.C. 1693a(6).

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Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations
opposed this approach arguing that it
would delay finality of check payments.
One commenter argued that if the Board
adopted this approach, then it also
should exempt remotely created checks
from the funds availability schedule in
Regulation CC because the availability
schedules are generally related to the
collection and return times for a check.
Other commenters viewed the
possible midnight deadline extension
not as an alternative to creation of new
warranties, but as a different
enforcement mechanism for the new
warranties. These commenters thought
that instead of having to make a
warranty claim outside of the check
collection process when the paying
bank seeks to recoup losses following a
breach of the remotely created check
warranty, extension of the midnight
deadline would enable the paying bank
to return the unauthorized remotely
created through the check collection
process. Many of the commenters in this
group advocated handling the warranty
claim on a ‘‘with entry’’ basis, which is
a procedure that has been adopted by
certain clearinghouses and which
allows a warranty claim to be made
through the procedures for returned
checks.17 A few commenters suggested
an additional nuance to this approach:
unauthorized remotely created checks
under $1000 should be handled on a
‘‘with entry’’ basis and unauthorized
remotely created checks over $1000
should be handled as a warranty claim
outside of the check collection and
return process.
Because the Board believes that
finality of payment and the discharge of
the underlying obligation are
fundamental and valuable features of
the check collection process, the final
rule does not make any adjustments to
the midnight deadline. Until otherwise
established by agreement, banks must
assert claims arising under transfer and
presentment warranties for remotely
created checks outside of the check
collection process.
Action by State Governments
The Board also requested comment on
whether it should refrain from
addressing remotely created checks in
Regulation CC and await adoption of the
U.C.C. warranties for remotely created
17 Under the Electronic Check Clearing House
Organization’s Uniform Paper Check Exchange
Rules, the paying bank ‘‘may make a warranty
claim’’ by ‘‘delivering such check to the
clearinghouse or the depositary bank for settlement,
in accordance with the clearinghouse’s rules for
returned checks.’’ While the claim is processed
through the return settlement process, the delivery
of the check to the clearing house, and ultimately
the depositary bank, is not a ‘‘return’’ of the check
under the U.C.C. or Regulation CC.

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checks, or some variation thereof, by all
of the states. Numerous commenters
expressed opposition to this approach.
Generally, these commenters argued
that states have been too slow to act on
this issue and have not and will not
necessarily act uniformly. However, one
commenter urged the Board to refrain
from usurping the U.C.C. process,
arguing that hesitancy by state
legislatures to adopt a uniform law may
signal defects in the proposed
amendment. In light of the comments
favoring action by the Board from the
Permanent Editorial Board of the U.C.C.,
as well as thirty-five state Attorneys
General, the Board believes that there is
broad support for amendments to
Regulation CC to address remotely
created checks on a nationwide basis
and that such amendments are
appropriate.
Section-by-Section Analysis
Section 229.2(fff) Definition
The Board proposed the following
definition: A remotely created check
means a check that is drawn on a
customer account at a bank, is created
by the payee, and does not bear a
signature in the format agreed to by the
paying bank and the customer.
Commenters had numerous concerns
regarding the scope of the proposed
definition.
On the issue of whether the definition
of remotely created checks should cover
items drawn on both consumer and nonconsumer accounts, all but one of the
commenters addressing this issue
supported covering remotely created
checks drawn on both consumer and
non-consumer accounts. These
commenters stated that there is no
reason to distinguish between fraud
against consumers and fraud against
businesses for purposes of this rule.18
Furthermore, one commenter noted that,
as an operational matter, it would be
more efficient for banks to treat
remotely created checks drawn on both
consumer and non-consumer accounts
the same. For these reasons, the final
rule applies to remotely created checks
18 The one commenter that favored limiting the
scope to consumer items argued that if the
definition covers commercial accounts, it would
weaken the ability of the bank to contract with its
commercial customers for timely review of account
activity. The Board does not believe this concern
warrants a limitation on the scope of the definition.
The Board’s final rule creates transfer and
presentment warranties among banks and is not
intended to interfere with the contractual
relationships between depository institutions and
their customers. The legal relationship between the
paying bank and its customer with respect to
whether a check was authorized or whether a claim
was made in a timely manner continues to be
governed by state law.

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drawn on both consumer and nonconsumer accounts.
With respect to the other elements of
the definition, numerous commenters,
particularly large depository
institutions, preferred the following
definition (or minor variations thereon):
A remotely created check is a check that
(i) Is drawn on a customer account at a
bank, (ii) is not created by the paying
bank, and (iii) does not bear a signature
purporting to be the signature of the
customer. In the alternative, several
commenters favored the definition of
demand draft in the commercial code of
California, arguing that this definition
has been adopted in a number of states
and has been applied successfully over
the past nine years.19
With respect to the proposal that a
remotely created check must be created
by the payee, numerous commenters
noted that depository institutions have
no physical means of distinguishing
between a remotely created check
created by a payee and a remotely
created check created by, for example, a
bill payment service on behalf of the
drawer.
The Board considered alternative
ways of defining remotely created
checks from the perspective of how they
were created. Under one formulation,
the definition could require that a check
not be created by the paying bank in
order to be a remotely created check.
The advantage of that formulation is
that the paying bank should be able to
determine whether it created a check
and whether the warranty applies. That
requirement, however, would not
exclude a check created by the customer
(such as a check that a customer filled
out but forgot to sign) or the customer’s
agent, such as a bill payment service.
However, the Board believes that these
checks do not present the same risk that
the check was not actually authorized
by the drawer as the typical
telemarketer-created check that is made
payable to the entity that created it.
Under another formulation, the
definition could exclude checks that are
created by the paying bank as well as
checks that are created by the customer
or the customer’s agent. This
formulation, however, would exclude
from the warranty checks created by
telemarketers or other payees to the
19 Under California U.C.C. § 3104(k) a demand
draft means a writing not signed by a customer that
is created by a third party under the purported
authority of the customer for the purpose of
charging the customer’s account with a bank. A
demand draft shall contain the customer’s account
number and may contain any of the following: (1)
The customer’s printed or typewritten name. (2) A
notation that the customer authorized the draft. (3)
The statement ‘‘No Signature Required’’ or words to
that effect.

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extent they were acting as agent of the
customer, as well as checks created on
behalf of the customer by a bill payment
service. At a minimum, this formulation
would raise issues as to the scope of the
creating entity’s agency and would seem
to cause as many evidentiary difficulties
as the Board’s original proposal.
After considering the benefits and
drawbacks of each formulation, the
definition in the Board’s final rule
requires that a remotely created check
must be created by a person other than
the paying bank. This definition will be
operationally efficient for paying banks
because they easily can determine
whether the warranty applies to a
particular check. In addition, this
formulation is consistent with the
analogous definition in the U.C.C.
Under this definition, the parties to the
check will not have to distinguish
checks that are created by the payee
from checks that are created by a
customer’s bill-payment service in order
to assert a warranty claim. As noted
above, the definition will cover certain
checks created remotely by bill-payment
services, as well as checks that the
drawer created but neglected to sign,
where there is a less compelling reason
for shifting liability for unauthorized
checks to the depositor’s bank.
Including these checks, however, is
unlikely to result in significantly greater
liability for depositary banks. It appears
that such checks are generally less
prone to fraud, and, therefore, less
prone to trigger a warranty claim than
are payee-created checks.
Numerous commenters objected to the
requirement that a remotely created
check not bear a signature ‘‘in the
format’’ agreed to by the paying bank
and the customer. Many commenters
argued that litigation will ensue over the
meaning of the phrase ‘‘in the format,’’
and that the language will sweep
traditional forged checks into the
warranty because a forged check may be
deemed to not bear a signature in the
format agreed to by the paying bank and
its customer. Most commenters favored
focusing simply on whether a signature
was present or not. The language of the
proposed definition was intended to
introduce greater specificity around the
term ‘‘signature,’’ which is very broadly
defined under the U.C.C., to ensure that
the definition does not include
traditional forged checks in the
warranties. However, in light of the
persuasive criticism from numerous
commenters, the final rule requires that
a remotely created check not bear a
signature ‘‘applied by, or purported to
be applied by, the person on whose
account the check is drawn.’’ The
commentary to the final rule explains

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that the term ‘‘applied by’’ refers to the
physical act of placing the signature on
the check. This formulation should
more clearly exclude traditional forged
checks from the operation of the new
warranties, but include checks created
by telemarketers and similar payees.
Several commenters noted that under
the definition of customer account in
Regulation CC, checks drawn on
accounts such as money market
accounts and credit accounts would be
excluded from the definition of
remotely created check, because the
proposed definition is limited to checks
drawn on a customer account, which
under Regulation CC does not include
all types of accounts on which checks
can be drawn. These commenters
pointed out that the U.C.C. definition of
remotely created checks, which covers
‘‘accounts’’ as defined by the U.C.C.,
includes checks drawn on various types
of consumer checking accounts and the
Board should also expand its definition
of customer account for purposes of the
remotely created check warranties. The
Board sees no reason to exclude these
types of checks from the operation of
the new warranties and the final rule
expands the definition of account in the
final rule, solely for the purposes of the
new warranties, to include any credit or
other arrangement that allows a person
to draw checks on a bank.
Commenters also argued that the
definition of remotely created check
should cover ‘‘payable through’’ or
‘‘payable at’’ checks. Many of these
checks are drawn on a nonbank, such as
a mutual fund, but payable through or
at a bank. Under Regulation CC the term
‘‘check’’ means a negotiable demand
draft drawn on or payable through or at
an office of a bank.20 Therefore, the
definition of remotely created check
could include a ‘‘payable through’’ or
‘‘payable at’’ check if the other
requirements of the regulation are met.
With regard to the requirement that a
remotely created check not bear the
signature of the account-holder, the
signature of the person on whose
account the check is drawn would be
the signature of the payor institution
(e.g., a mutual fund) or the signatures of
the customers who are authorized to
draw checks on that account, depending
on the arrangements between the
‘‘payable through’’ or ‘‘payable at’’ bank,
the payor institution, and the customers.
The Board has added clarifying
language to the commentary.
One commenter urged the Board to
confirm that a substitute check created
from a remotely created check benefits
from the warranties for remotely created

checks. The commentary to the final
rule specifically states that the transfer
and presentment warranties for
remotely created checks would apply to
a substitute check that represents a
remotely created check.
Section 229.34 Warranties
The Board proposed the following
transfer and presentment warranties
with respect to a remotely created
check: A bank that transfers or presents
a remotely created check and receives a
settlement or other consideration
warrants to the transferee bank, any
subsequent collecting bank, and the
paying bank that the person on whose
account the remotely created check is
drawn authorized the issuance of the
check according to the terms stated on
the check.
Numerous commenters urged the
Board to limit the warranty to the terms
stated on the ‘‘face of the check.’’ Others
urged the Board to adopt the U.C.C.
approach, requiring only a warranty that
‘‘the person on whose account the check
is drawn authorized the issuance of the
check in the amount for which it is
drawn.’’ 21 Commenters argued that the
proposed warranty could be construed
to cover the indorsements on the back
of the check and the date. The Board did
not intend to create warranties that
would cover the indorsements on a
remotely created check because the
U.C.C. already contains indorsement
warranties. In addition, other
information on the front of the check,
such as the date, does not give rise to
the risk of fraud as does the name of the
payee and the amount. Accordingly, the
final rule states with specificity that the
transfer and presentment warranties
apply only to the fact of authorization
by the account holder, the amount
stated on the check, and issuance to the
payee stated on the check.
A few commenters suggested that the
depositor of a remotely created check
should also be required to make the new
warranties, as is the case with the U.C.C.
warranties relating to remotely created
consumer items. One commenter
suggested that the customer of the
paying bank should be able to assert a
§ 229.34(d) warranty claim directly
against a transferring or presenting
bank. The authority under which the
Board is adopting this amendment is
limited to establishing rules imposing or
allocating losses and liability among
depository institutions in connection
with any aspect of the payment
system.22 However, although these
warranties do not extend to losses and
21 See

20 12

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e.g. U.C.C. 3–417(a)(4).
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liability as between depository
institutions and their nonbank
customers, banks may choose to allocate
liability to customers by agreement. The
final rule also does not alter the rights
or liabilities of customers of depository
institutions under state law.
Commenters also suggested that the
commentary address the situation in
which the customer authorizes that the
check be made payable to the payee’s
trade name, but the check is instead
made payable to the legal name of the
payee. Under the new transfer and
presentment warranties, banks will
warrant that the customer authorized
the issuance of the check to the payee
stated on the check. Whether an
alteration of the payee’s name from the
trade name to the legal name would
result in a breach of warranty will
depend on whether the change is within
the scope of the customer’s
authorization. Because that
determination would have to be made
on a case-by-case basis, the Board has
not added any general statement on
such a situation to the commentary.
A number of commenters urged the
Board to state explicitly that the
warranties would not cover the situation
in which the initial authorization by the
account-holder was subsequently
disclaimed as the result of ‘‘buyer’s
remorse’’ by the account-holder. As
noted in the proposed rule, the Board
anticipates that the transfer and
presentment warranties will supplement
the FTC’s Telemarketing Sales Rule (16
CFR 310.3(a)(3)), which requires
telemarketers that submit instruments
for payment to obtain the customer’s
‘‘express verifiable authorization.’’ A
depositary bank could tender the
authorization obtained by its
telemarketer customer as a defense to a
paying bank warranty claim. Therefore,
the paying bank would not prevail on a
warranty claim if the customer had, in
fact, authorized the transaction but later
suffered ‘‘buyer’s remorse.’’ If the
paying bank can show that the check
was properly payable from the
customer’s account, then it would be
able to charge the account for the check
in accordance with U.C.C. 4–401.
Defenses to Warranty Claims
Several commenters argued that when
a paying bank makes a claim under the
remotely created check warranties a
depositary bank should be able to assert
certain defenses that the paying bank
would have against its customer under
the U.C.C. Specifically, the commenters
noted that U.C.C. 4–406 places a duty
on a customer to discover and report
unauthorized checks with reasonable
promptness and limits a paying bank’s

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liability if the customer fails to perform
that duty. The commenters suggested
that a paying bank should be precluded
from asserting a warranty claim against
a depositary bank where the paying
bank’s liability to the customer would
have been limited by U.C.C. 4–406 had
the paying bank asserted its own
defenses. The commenters noted that
the U.C.C. warranty provisions permit
similar defenses by warranting banks.
The U.C.C. provides that the
warrantor may defend a warranty claim
based on an unauthorized indorsement
or alteration by proving that the drawer
is precluded from asserting that claim
because of his or her failure to discover
the lack of authorization in a timely
manner.23 The Official Comment
explains the purpose of the provision: if
the drawer’s conduct contributed to a
loss from a forged indorsement or
alteration, the drawee should not be
allowed to shift the loss from the drawer
to the warrantor.24 While the drafters of
the U.C.C. did not extend this defense
to an unauthorized remotely-created
consumer item, commenters argued that
the stated purpose of the U.C.C. 3–
417(c) defense should apply to a
remotely created check warranty claim
under Regulation CC. The Board
believes that such a defense would be
appropriate. Therefore, the regulation
and the commentary to the final rule
provide that the depositary bank may
defend a remotely created check
warranty claim by proving that
customer is precluded under U.C.C. 4–
406 from asserting a claim against the
paying bank for the unauthorized
issuance of the check. This may be the
case, for example, when the customer
fails to discover the unauthorized
remotely created check in a timely
manner.
One commenter stated that the
proposed warranty for remotely created
checks should be limited in a way that
is similar to the indemnification related
to the creation and collection of
substitute checks. The commenter
argued that the indemnity provision of
the Check Clearing for the 21st Century
Act, as implemented by Regulation CC,
shifts liability to the reconverting banks
for losses due to the absence of security
features that do not survive the imaging
process, and, therefore, do not appear
on substitute checks, only in those
instances in which the paying bank’s
processes actually would have relied on
the security features that were lost in
the imaging process. These lost security
features, it is argued, are analogous to
the lack of an authorized signature on
23 U.C.C.
24 U.C.C.

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3–417(c).
3–417, Official Comment, 6.

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71223

the remotely created check.25 The
commenter argued that by analogy the
warranty that the Board proposed with
respect to remotely created checks
should not apply under circumstances
in which the paying bank would not
have verified the signatures anyway, for
example because the checks were under
the dollar amount set by the paying
bank for such purposes.
The Board’s rule on remotely created
checks is intended to reduce the
fraudulent use of unauthorized remotely
created checks by creating an incentive
for depositary banks to be more vigilant
when accepting such checks for deposit.
This incentive would be seriously
weakened if the regulation required the
paying bank to make the showing
suggested by the commenter. Therefore,
the final rule does not adopt this
suggestion.
Effective Date
A number of commenters suggested
that the final rule include an
implementation period of not less than
six months. The final rule is effective
July 1, 2006.
Additional Considerations
MICR Line Identifier
The Board requested comment on
whether digits should be assigned in the
External Processing Code (EPC) Field
(commonly referred to as Position 44) of
the magnetic ink character recognition
(MICR) line to identify remotely created
checks. Most commenters opposed this
aspect of the proposal, arguing that the
unassigned digits in the EPC Field could
best serve other purposes and that
enforcement of such a rule would be
cumbersome at best. Ten commenters
specifically expressed support for
assigning digits in the EPC Field,
arguing that it would facilitate the
tracking of remotely created checks.
However, without broad support for
such a rule, and in light of the
impracticalities of enforcement, the
Board has determined not to pursue a
MICR identifier for remotely created
checks.
Relation to State Law
Many commenters supported the
proposed amendment to Regulation CC
as a means to establish uniformity with
respect to liability for unauthorized
remotely created checks. Some of these
commenters presumed that the
amendment to Regulation CC would
preempt state laws that address
unauthorized remotely created checks
or their equivalents. However, several
25 12 U.S.C. 5005, as implemented at 12 CFR
229.53(a) and the accompanying commentary.

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commenters raised the issue of
preemption explicitly by stating that the
warranties provided in Regulation CC
should preempt state law warranties
and that the one-year statute of limits
for actions under subpart C of
Regulation CC should preempt statute of
limitations for breach of demand draft
warranties under state law (generally 3
years). One commenter recommended
that the Board’s amendments explicitly
preempt the field to eliminate confusion
about the application of state laws that
govern remotely created checks. Section
608(b) of the Expedited Funds
Availability Act provides that Board
rules prescribed under that Act shall
supersede any provision of state law,
including the UCC as in effect in such
state, that is inconsistent with the Board
rules. To the extent that the state law is
inconsistent with the Board’s rules on
remotely created checks, the Board’s
rules would supersede such state law.
The Board will monitor the interaction
of state law and Regulation CC, and may
take further action at a later time if
necessary.
Price v. Neal
One commenter suggested that the
Board overrule the Price v. Neal
doctrine for all checks. The Price v. Neal
doctrine dates back to the 1760s and is
based on the assumption that the paying
bank should bear the loss for
unauthorized checks because it is in the
best position to prevent fraud by
comparing signatures on checks with
signature cards on file with the bank.
The commenter argued that, at present,
automated check processing that relies
on the MICR line means that signature
verification of checks by back-room
personnel no longer plays a meaningful
role in stopping check fraud. However,
other commenters argued that the
depositary bank generally has no better
means to detect unauthorized checks
than the paying bank and, therefore, the
argument would provide no logical
basis for abandoning the Price v. Neal
doctrine. Furthermore, as one
commenter noted, the advent of
signature recognition software may soon
enable the paying bank to verify
signatures on an automated basis. The
final rule reverses the Price v. Neal rule
for remotely created checks only.
However, the Board would welcome a
public dialogue on broader check law
issues, such as the utility of and
possible alternatives to the Price v. Neal
rule in the modern check processing
environment.

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Conforming Amendments to Regulation
J
The Board is also amending
Regulation J to make clear that the new
remotely created check warranties apply
to remotely created checks collected
through the Federal Reserve Banks.
Regulatory Analysis
Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3506;
5 CFR 1320 Appendix A.1) and under
authority delegated by the Office of
Management and Budget, the Board has
reviewed the final rule and determined
that it contains no collections of
information.
Regulatory Flexibility Act
In accordance with the Regulatory
Flexibility Act (RFA), an agency must
publish a final regulatory flexibility
analysis with its final rule, unless the
agency certifies that the rule will not
have a significant economic impact on
a substantial number of small entities. (5
U.S.C. 601–612.) The Board certifies
that the rule will not have a significant
economic impact on a substantial
number of small entities.
The RFA requires agencies to examine
the objectives, costs and other economic
implications on the entities affected by
the rule. (5 U.S.C. 603.) Under section
3 of the Small Business Act, as
implemented at 13 CFR part 121,
subpart A, a bank is considered a ‘‘small
entity’’ or ‘‘small bank’’ if it has $150
million or less in assets. Based on June
2005 call report data, the Board
estimates that there are approximately
13,400 depository institutions with
assets of $150 million or less.
The amendments to Regulation CC
create a definition of a remotely created
check and warranties that apply when a
remotely created check is transferred or
presented. The amendments require any
bank that transfers or presents a
remotely created check to warrant that
the person on whose account the
remotely created check is drawn
authorized the issuance of the check in
the amount stated on the check and to
the payee stated on the check. The
purpose of the amendments is to place
the liability for an unauthorized
remotely created check on the bank that
is in the best position to prevent the
loss. By shifting the liability to the bank
in the best position to prevent the loss
caused by the payment of an
unauthorized remotely created check,
the Board anticipates that the
amendments will reduce costs for all
banks that handle remotely created
checks. Banks seeking to minimize the

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risk of liability for transferring remotely
created checks will likely screen with
greater scrutiny customers seeking to
deposit remotely created checks. The
Board believes that the controls that
small institutions will develop and
implement to minimize the risk of
accepting unauthorized remotely
created checks for deposit likely will
pose a minimal negative economic
impact on those entities. Furthermore,
there was unanimous support for
transfer and presentment warranties for
remotely created checks from the small
institutions that commented on the
proposal. These institutions noted that
the warranties will enable them to
reduce losses they currently suffer when
they inadvertently pay an unauthorized
remotely created check.
The RFA requires agencies to identify
all relevant Federal rules which may
duplicate, overlap or conflict with the
proposed rule. As noted above, the
Board’s Regulation J includes crossreferences to the warranties set forth in
Regulation CC and the rule amends such
cross-references to include the
warranties. As also noted above, the rule
overlaps with at least 19 state codes that
presently provide warranties for
instruments that are similar to remotely
created checks.
List of Subjects in 12 CFR Parts 210 and
229
Banks, Banking, Federal Reserve
System, Reporting and recordkeeping
requirements.
Authority and Issuance
For the reasons set forth in the
preamble, the Board is amending parts
210 and 229 of chapter II of title 12 of
the Code of Federal Regulations as set
forth below:

■

PART 210—COLLECTION OF CHECKS
AND OTHER ITEMS BY FEDERAL
RESERVE BANKS AND FUNDS
TRANSFERS THROUGH FEDWIRE
(REGULATION J)
1. The authority citation for part 210
continues to read as follows:

■

Authority: 12 U.S.C. 248(i) and (j), 12
U.S.C. 342, 12 U.S.C. 464, 12 U.S.C. 4001 et
seq., 12 U.S.C. 5001–5018.

2. In § 210.5, revise paragraph (a)(3) to
read as follows:

■

§ 210.5 Sender’s agreement; recovery by
Reserve Bank.

(a) * * *
(3) Warranties for all electronic items.
The sender makes all the warranties set
forth in and subject to the terms of 4–
207 of the U.C.C. for an electronic item
as if it were an item subject to the U.C.C.

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and makes the warranties set forth in
and subject to the terms of § 229.34(c)
and (d) of this chapter for an electronic
item as if it were a check subject to that
section.
*
*
*
*
*
■ 3. In § 210.6, revise paragraph (b)(2) to
read as follows:

section as well as a credit or other
arrangement that allows a person to
draw checks that are payable by,
through, or at a bank.
■ 7. In § 229.34, redesignate paragraphs
(d), (e), and (f) as paragraphs (e), (f), and
(g), and add a new paragraph (d) to read
as follows:

§ 210.6 Status, warranties, and liability of
Reserve Bank.

§ 229.34

*

*
*
*
*
(b) * * *
(2) Warranties for all electronic items.
The Reserve Bank makes all the
warranties set forth in and subject to the
terms of 4–207 of the U.C.C. for an
electronic item as if it were an item
subject to the U.C.C. and makes the
warranties set forth in and subject to the
terms of § 229.34(c) and (d) of this
chapter for an electronic item as if it
were a check subject to that section.
*
*
*
*
*
■ 4. In § 210.9, revise paragraph (b)(5) to
read as follows:
§ 210.9

Settlement and payment.

*

*
*
*
*
(b) * * *
(5) Manner of settlement. Settlement
with a Reserve Bank under paragraphs
(b)(1) through (4) of this section shall be
made by debit to an account on the
Reserve Bank’s books, cash, or other
form of settlement to which the Reserve
Bank agrees, except that the Reserve
Bank may, in its discretion, obtain
settlement by charging the paying
bank’s account. A paying bank may not
set off against the amount of a
settlement under this section the
amount of a claim with respect to
another cash item, cash letter, or other
claim under § 229.34(c) and (d) of this
chapter (Regulation CC) or other law.
*
*
*
*
*
PART 229—AVAILABILITY OF FUNDS
AND COLLECTION OF CHECKS
(REGULATION CC)

5. The authority citation for part 229
continues to read as follows:

■

Authority: 12 U.S.C. 4001 et seq., 12 U.S.C.
5001–5018.

6. In section 229.2, add a new
paragraph (fff) to read as follows:

■

§ 229.2

Definitions.

*

*
*
*
*
(fff) Remotely created check means a
check that is not created by the paying
bank and that does not bear a signature
applied, or purported to be applied, by
the person on whose account the check
is drawn. For purposes of this
definition, ‘‘account’’ means an account
as defined in paragraph (a) of this

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71225

OO. 229.2(oo) Interest Compensation
1. This calculation of interest
compensation derives from U.C.C. 4A–
506(b). (See §§ 229.34(e) and 229.36(f).)

*

*

*

*

*

§ 229.43 Checks payable in Guam,
American Samoa, and the Northern Mariana
Islands.

FFF. 229.2(fff) Remotely Created Check
1. A check authorized by a consumer over
the telephone that is not created by the
paying bank and bears a legend on the
signature line, such as ‘‘Authorized by
Drawer,’’ is an example of a remotely created
check. A check that bears the signature
applied, or purported to be applied, by the
person on whose account the check is drawn
is not a remotely created check. A typical
forged check, such as a stolen personal check
fraudulently signed by a person other than
the drawer, is not covered by the definition
of a remotely created check.
2. The term signature as used in this
definition has the meaning set forth at U.C.C.
3–401. The term ‘‘applied by’’ refers to the
physical act of placing the signature on the
check.
3. The definition of a ‘‘remotely created
check’’ differs from the definition of a
‘‘remotely created consumer item’’ under the
U.C.C. A ‘‘remotely created check’’ may be
drawn on an account held by a consumer,
corporation, unincorporated company,
partnership, government unit or
instrumentality, trust, or any other entity or
organization. A ‘‘remotely created consumer
item’’ under the U.C.C., however, must be
drawn on a consumer account.
4. Under Regulation CC (12 CFR part 229),
the term ‘‘check’’ includes a negotiable
demand draft drawn on or payable through
or at an office of a bank. In the case of a
‘‘payable through’’ or ‘‘payable at’’ check, the
signature of the person on whose account the
check is drawn would include the signature
of the payor institution or the signatures of
the customers who are authorized to draw
checks on that account, depending on the
arrangements between the ‘‘payable through’’
or ‘‘payable at’’ bank, the payor institution,
and the customers.
5. The definition of a remotely created
check includes a remotely created check that
has been reconverted to a substitute check.

*

*

Warranties.

*

*
*
*
*
(d) Transfer and presentment
warranties with respect to a remotely
created check. (1) A bank that transfers
or presents a remotely created check
and receives a settlement or other
consideration warrants to the transferee
bank, any subsequent collecting bank,
and the paying bank that the person on
whose account the remotely created
check is drawn authorized the issuance
of the check in the amount stated on the
check and to the payee stated on the
check. For purposes of this paragraph
(d)(1), ‘‘account’’ includes an account as
defined in § 229.2(a) as well as a credit
or other arrangement that allows a
person to draw checks that are payable
by, through, or at a bank.
(2) If a paying bank asserts a claim for
breach of warranty under paragraph
(d)(1) of this section, the warranting
bank may defend by proving that the
customer of the paying bank is
precluded under U.C.C. 4–406, as
applicable, from asserting against the
paying bank the unauthorized issuance
of the check.
*
*
*
*
*
■ 8. In § 229.43, revise paragraph (b)(3)
to read as follows:

*
*
*
*
(b) Rules applicable to Pacific islands
checks. * * *
(3) § 229.34(c)(2), (c)(3), (d), (e), and
(f);
*
*
*
*
*
■ 9. In Appendix E to part 229:
■ a. Under paragraph II., § 229.2,
paragraph (OO) is revised and a new
paragraph (FFF) is added.
■ b. Under paragraph XX., § 229.34,
redesignate paragraphs D., E., and F. as
paragraphs E., F., and G., and add a new
paragraph D.
Appendix E to Part 229—Commentary
*

*

*

*

*

II. Section 229.2

Definitions

*

*

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*

*

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*

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*

*

*

XX. Section 229.34

*

*

*

*

*
Warranties

*

D. 229.34(d) Transfer and Presentment
Warranties
1. A bank that transfers or presents a
remotely created check and receives a
settlement or other consideration warrants
that the person on whose account the check
is drawn authorized the issuance of the check
in the amount stated on the check and to the
payee stated on the check. The warranties are
given only by banks and only to subsequent
banks in the collection chain. The warranties
ultimately shift liability for the loss created
by an unauthorized remotely created check to
the depositary bank. The depositary bank
cannot assert the transfer and presentment
warranties against a depositor. However, a
depositary bank may, by agreement, allocate
liability for such an item to the depositor and
also may have a claim under other laws
against that person.

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2. The transfer and presentment warranties
for remotely created checks supplement the
Federal Trade Commission’s Telemarketing
Sales Rule, which requires telemarketers that
submit checks for payment to obtain the
customer’s ‘‘express verifiable authorization’’
(the authorization may be either in writing or
tape recorded and must be made available
upon request to the customer’s bank). 16 CFR
310.3(a)(3). The transfer and presentment
warranties shift liability to the depositary
bank only when the remotely created check
is unauthorized, and would not apply when
the customer initially authorizes a check but
then experiences ‘‘buyer’s remorse’’ and
subsequently tries to revoke the authorization
by asserting a claim against the paying bank
under U.C.C. 4–401. If the depositary bank
suspects ‘‘buyer’s remorse,’’ it may obtain
from its customer the express verifiable
authorization of the check by the paying
bank’s customer, required under the Federal
Trade Commission’s Telemarketing Sales
Rule, and use that authorization as a defense
to the warranty claim.
3. The scope of the transfer and
presentment warranties for remotely created
checks differs from that of the corresponding
U.C.C. warranty provisions in two respects.
The U.C.C. warranties differ from the
§ 229.34(d) warranties in that they are given
by any person, including a nonbank
depositor, that transfers a remotely created
check and not just to a bank, as is the case
under § 229.34(d). In addition, the U.C.C.
warranties state that the person on whose
account the item is drawn authorized the
issuance of the item in the amount for which
the item is drawn. The § 229.34(d) warranties
specifically cover the amount as well as the
payee stated on the check. Neither the U.C.C.
warranties, nor the § 229.34(d) warranties
apply to the date stated on the remotely
created check.
4. A bank making the § 229.34(d)
warranties may defend a claim asserting
violation of the warranties by proving that
the customer of the paying bank is precluded
by U.C.C. 4–406 from making a claim against
the paying bank. This may be the case, for
example, if the customer failed to discover
the unauthorized remotely created check in
a timely manner.
5. The transfer and presentment warranties
for a remotely created check apply to a
remotely created check that has been
reconverted to a substitute check.

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By order of the Board of Governors of the
Federal Reserve System, November 21, 2005.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 05–23331 Filed 11–25–05; 8:45 am]
BILLING CODE 6210–01–P