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Federal R eserve Bank
OF DALLAS
W ILLIAM H. W ALLACE

DALLAS. TEXAS 7 5 2 2 2

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

October 28, 1988
Circular 88-78

TO:

The Chief Operations Officer of
all financial institutions in the
Eleventh Federal Reserve District

SUBJECT
Final rule on handling of "payable through" checks under the
Expedited Funds Availability Act and request for comment
DETAILS
The Federal Reserve Board has issued a final ruling under the
Expedited Funds Availability Act stating that "payable through" checks must be
treated as local or nonlocal checks based on the location of the institution
on which they are written rather than the "payable through" bank. This action
finalizes an interim amendment adopted by the Board in August in response to a
court order.
In addition, the Board published for public comment four proposals
designed to help ease the operational difficulties and lessen the risks
imposed on financial institutions as a result of the court's order. The
proposals would:
*

require bank payable through checks to bear a local routing number in
the MICR line and to have a local presentment point;

*

require such checks to be conspicuously labeled as payable through
checks and to contain specified information;

*

allow these checks to be presented directly to the bank on which they
are written; and

*

reallocate the risk of loss where the checks are payable through a
nonlocal bank.

A more detailed explanation of the ruling and the proposals for
Regulation CC which implements the Expedited Funds Availability Act are
attached. Any comments should be sent by December 30, 1988, to William W.
Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th and C
Streets, N.W., 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)

- 2 -

ATTACHMENTS
The Board's notices regarding this issue are attached.

MORE INFORMATION
For additional information, please contact Robert L. Whitman (214)
698-4357 or Dean A. Pankonien (214) 651-6662 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
[Regulation CC; Docket No. R-0648]
Availability of Funds and Collection of Checks

AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Proposed rule.

SUMMARY:

The Board is publishing for comment proposed

amendments to its Regulation CC, Availability of Funds and
Collection of Checks (12 CFR Part 229).

The proposed rule

changes would alleviate the operational difficulties and
additional risks associated with the acceptance for deposit of
payable through checks.
DATES:

Comments must be submitted on or before December 30,

1988.
ADDRESSES:

Comments, which should refer to Docket No. R-064 8,

may be mailed to the Board of Governors of the Federal Reserve
System, 20th and C Streets, NW, Washington, DC 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 at the above address will be included in the public
file and may be inspected at Room B-1122 between 8:45 a.m. and
5:15 p.m.
FOR FURTHER INFORMATION CONTACT:

Louise L. Roseman, Assistant

Director (202/452-3874), Gayle Thompson, Program Leader
(202/452-2934), Division of Federal Reserve Bank Operations;

- 2 Oliver Ireland, Associate General Counsel

(202/452-3625),

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 Board has adopted, with minor technical changes,
the interim rule issued on August 18, 1988, to amend
Regulation CC to treat "bank payable through checks" as local or
nonlocal based on the location of the bank1 on which they are
written rather than the location of the bank through which they
are payable, as a final rule.

(See Docket R-0643, published

elsewhere in today's Federal Register.)

The Board is issuing,

for a 60-day public comment period, proposed amendments to
Regulation CC designed to alleviate the operational difficulties
and additional risks resulting from this final rule.
BACKGROUND
As adopted in May 1988, Regulation CC provided that
checks written on an account at one bank but payable through
another bank were to be considered local or nonlocal under
Regulation CC and the Expedited Funds Availability Act ("Act")

R e g u l a t i o n 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.

based on the location of the bank designated as the payable
through bank.

This treatment of "bank payable through checks"

was consistent with the scheme set forth in the Act to permit
banks to place longer holds on checks that must be sent to
nonlocal banks for collection because such checks generally take
longer to collect and return than checks sent to local banks for
collection and, therefore, could pose greater risks for
depositary banks.2

In addition, treating the payable through

bank as the paying bank would facilitate the handling of these
checks by depositary banks because it would permit them to use
automated equipment to read the routing number of the payable
through bank encoded on a check, which indicates the check
processing region where the payable through bank is located, and
to assign availability for the check on the basis of that
number.
Shortly after the Board adopted Regulation CC defining
the payable through bank as the paying bank and thus allowing
bank payable through checks to be treated as local or nonlocal

2Under the regulation, depositary banks may
differentiate funds availability based on whether the check is
written on a local or nonlocal paying bank.
A local paying bank is
one located in the same check processing region as the depositary
bank.
As of September 1, 1988, depositary banks must make the
proceeds of local checks available for withdrawal not later than
three business days following deposit; nonlocal checks must be made
available for withdrawal not later than seven business days
following deposit.
On September 1, 1990, these schedules are
reduced to two and five business days for local and nonlocal
checks, respectively.

according to the location of the payable through bank, the
Credit Union National Association ("CUNA") and one of its member
credit unions brought suit asserting that this rule was contrary
to the provisions of the Act, and that such checks, in
particular credit union share drafts, should be treated as local
or nonlocal on the basis of the location of the bank on which
they are written, rather than the location of the payable
through bank.

CUNA believed that the treatment of bank payable

through checks adopted by the Board would have an adverse effect
on the acceptability of these checks as a form of payment
because most credit union payable through checks would be
treated as nonlocal, even though they would generally be
deposited in a bank local to the credit union.

CUNA argued that

if these checks were generally treated as nonlocal, a large
number of credit unions that offer payable through share draft
accounts would be disadvantaged.
On July 28, 1988, the U.S. District Court for the
District of Columbia ruled that under the language of the Act,
bank payable through checks should be treated as local or
nonlocal on the basis of the location of the credit union rather
than the location of the payable through bank.

On August 18,

1988, the Board adopted interim amendments to Regulation CC to
implement the court's decision and requested comment on the
interim rule pending consideration of a longer term response to
the court's interpretation of the Act.

53 FR 31290 (August 18,

- 5 1988) .

The interim rule applied the court's decision to all

bank payable through checks rather than only those written on
credit unions.
The Board received 155 comments on the interim rule.
(A summary of the comments appears below.)

The overwhelming

majority of the commenters (14 4) objected to the treatment of
bank payable through checks as local or nonlocal on the basis of
the location of the bank on which they are written, because this
rule creates operational difficulties and increased risks for
depositary banks.

Many of the commenters suggested various

means of addressing these operational problems and risks.
The Board has adopted the interim rule, with minor
technical changes, and is also proposing for comment amendments
to Regulation CC designed to alleviate the operational
difficulties and increased risks resulting from the interim
rule.

These proposed amendments are based on specific

suggestions of the commenters and on subsequent discussions with
industry representatives and the Industry Return Item Advisory
Group, which includes representatives of commercial banks,
savings and loan associations, and credit unions.

The Board is

issuing these proposals for comment to gain further information
concerning whether the proposals are necessary to facilitate
compliance with the revised regulation and to improve the check
system by speeding the collection and return of payable through
checks, and whether they impose undue burdens on the banks on
which bank payable through checks are written.

- 6 DISCUSSION
Although bank payable through checks represent only two
to three percent of the approximately 4 7 billion checks written
each year, they are sufficiently prevalent to create substantial
operational problems for banks in complying with the Act, as
interpreted by the court, and Regulation CC, as amended by the
interim rule, and to increase the risk of check fraud for
depositary banks.

Available data indicate that the two largest

payable through processors handle approximately 700 million bank
payable through checks each year.

Although the majority of bank

payable through checks are written on the more than 4,000 credit
unions that use such checks, they are also used by some savings
and loan associations and commercial banks.

The Board has

identified at least 65 banks across the country that serve as
payable through banks and believes that others exist that have
not yet been identified.
Ordinarily, many banks that provide different
availability for local and nonlocal checks identify the checks
as local or nonlocal based on the routing number in the Magnetic
Ink Character Recognition ("MICR") line on the bottom of the
checks.

This routing number is either entered into the bank's

computer system by the teller at the time the transaction is
made (on-line processing) or read from the check using automated
equipment during subsequent processing (batch processing).

The

first four digits of the nine-digit routing number are used to
identify the Federal Reserve check processing region to which

- 7 the check is sent for payment and thus permit the bank to
readily identify whether a check is local or nonlocal.

In the

case of a bank payable through check, however, the routing
number cannot be used to determine whether the check is local or
nonlocal because it identifies the payable through bank rather
than the bank on which the check is written.
Accordingly,

in order to determine whether a check is

local or nonlocal, depositary banks must first determine whether
it is a payable through check.
identify these checks.

Generally, there are two ways to

First, they can be identified by visual

inspection by the teller at the time that the checks are
received for deposit.

This procedure is labor intensive, and

therefore costly, and prone to the high level of errors
associated with manual processing.

Once a check is identified

as a payable through check, it may still be difficult to
determine whether the check is local or nonlocal because some
bank payable through checks do not contain on the face of the
check the location of the bank on which they are written.

Even

if this information is included on the face of the check, the
local/nonlocal determination may be difficult to make due to the
information's placement on the check or its type size.
addition,

In

in cases where the location is clearly identifiable,

it may be a difficult task to determine whether the bank on
which the check is written is in the same check processing
region as the depositary bank, because most check processing
regions contain only portions of states.

The depositary bank

- 8 may need to refer to a list of cities and towns in its check
processing region to determine if the bank payable through check
is local for purposes of Regulation CC.3
The second way to identify bank payable through checks
is to program a check reader-sorter to outsort all checks
bearing the routing number of the payable through banks and
either to assign those checks local availability, even when they
are not payable by a local bank, or to inspect them visually to
determine whether they should be assigned local or nonlocal
availability.

Although many bank payable through checks bear

routing numbers that are used almost exclusively for such
checks, others bear routing numbers that are also used for
significant numbers of non-payable through checks.

In addition,

some payable through banks serve banks in a number of Federal
Reserve check processing regions.

Treating all checks bearing

the routing number of a payable through bank as local also
results in giving local availability to an unknown number of
checks that may be treated as nonlocal.

In addition, it creates

an incentive for banks to act as payable through banks so that
their checks may be considered local by banks that use this
approach to comply.

Further, as noted above, it is difficult to

identify all banks that serve as payable through banks.

A bank

3Listings of cities and states in individual Federal
Reserve check processing regions are available upon request from
local Federal Reserve Bank offices.

- 9 may begin or cease acting as a payable through bank at any
time.

Any listing of payable through bank routing numbers is

likely to omit certain payable through banks, thus causing banks
relying on that list to violate the Act by giving nonlocal
availability to checks that should receive local availability
under the Act.

Finally, commenters indicated that if a bank

wishes to inspect bank payable through checks visually once they
have been identified in order to determine whether they are
local or nonlocal, that process will be costly and error-prone
and may delay the collection of those checks.
In addition to the operating problems caused by bank
payable through checks, these checks are attractive vehicles for
check fraud.

The time that it takes bank payable through checks

to travel to and from the depositary bank is a function of its
location in relation to the payable through bank, not the bank
on which the check is written.4

Consequently, it generally

takes longer for checks that are sent to a nonlocal payable
through bank to be collected and returned than it does for

4Chase Manhattan, one of the two major national payable
through processors, stated in its comments:
". . . i f the payor
bank decides not to pay a draft, the time that it takes the draft
to travel to the depositary bank is a function of its location in
relation to the payable through bank, not the payor bank.
Therefore, when a payable through bank returns a draft received
from a nonlocal depositary bank, it must be afforded the benefit of
the longer return time for nonlocal items notwithstanding that the
payor bank may be in the same check processing region as the
depositary bank."

checks that are sent to a local bank.

In the case of many

depositary banks, these collection and return times will
regularly exceed the availability schedules in the Act for local
checks.

Persons wishing to commit check fraud on those

depositary banks would be able to rely on the fact that the bank
must make the proceeds of the checks available for withdrawal
before it had an opportunity to learn that the checks had been
dishonored.
Under the Expedited Funds Availability Act, the Board
has the authority to adopt regulations to address these
problems.

Although the language of the Act governing the

availability of checks is sufficiently specific for the court to
conclude that the Act requires local availability for bank
payable through checks written on local banks but payable
through nonlocal banks, the Act gives the Board general
authority to regulate the check collection system.
609(c)(1)

Section

of the Act provides:

RESPONSIBILITY FOR PAYMENT SYSTEM— In order to carry
out the provisions of this title, the Board of
Governors of the Federal Reserve System shall have the
responsibility to regulate—
(A) any aspect of the payment system, including
the receipt, payment, collection, or clearing of
checks; and
(B) any related function of the payment system
with respect to checks.
This authority is extremely broad and, together with section
609(a) of the Act, which authorizes the Board to prescribe rules
to facilitate compliance with the Act, gives the Board the

- 11 authority to adopt reasonable changes to the way that checks are
handled, provided that those changes further the purposes of the
Act, such as by expediting the collection and return of checks
or facilitating compliance with the availability schedules.
The Board believes that there are a number of
approaches to dealing with the operational and risk problems
associated with bank payable through checks, including:

(1)

requiring such checks to be presentable locally and to bear a
local routing number in the MICR line;

(2) requiring such checks

to be conspicuously labeled as payable through checks,
specifying the name and location of the payable through bank and
the name, location, and nine-digit routing number of the bank on
which the check is written;

(3) authorizing collecting banks to

present such checks directly to the bank on which they are
written; and (4) shifting to the bank on which the check is
written the risks of loss due to the time required for the
return of such checks from nonlocal payable through banks.
1.

Require bank payable through checks to be

presentable locally and bear a local routing number in the MICR
line.

Eighty-nine commenters expressed concern about the

operational problems posed by the court ruling and interim
amendments.

A number of these commenters suggested that the

Board require credit unions to encode their own routing numbers
on their checks, or that of a local payable through bank.

This

would permit depositary banks to determine whether any check is
local or nonlocal through the use of automated equipment,

because the routing number encoded on the check would indicate
the check processing region of the bank on which the check is
written.

Therefore, this approach would effectively remove the

operational difficulties in assigning appropriate availability
to these checks.
In addition, this proposal would address the concerns
expressed by 111 commenters regarding the potential risk of
additional losses and increased exposure to fraud for depositary
banks as a result of the revised rule defining the bank on which
the payable through check is written as the paying bank for
determining funds availability.

The proposal would eliminate

the likelihood that these checks would become attractive
vehicles for check fraud because a bank payable through check
with a local routing number could be presented to the local
address associated with the routing number, maintaining a clear
link between the time it takes to collect and return the check
and the time within which the depositary bank must make the
funds available to the depositor.
This proposal would require the reissuance of payable
through checks encoded with routing numbers not associated with
the same check processing region as the bank on which the checks
are written and may also require a bank to change its payable
through check processor.

The cost of reissuing checks and

converting to a different processor depends,

in part, on the

lead time between the adoption of the proposal in final form and
the effective date of this requirement.

These costs would have

to be weighed against the costs to the banking industry in
general of identifying bank payable through checks by other
means and the risks arising from the use of nonlocal payable
K

through banks for these checks.
When some credit unions began offering share draft
accounts to their members in the mid-1970s, they used payable
through banks exclusively to process checks written on those
accounts (predominantly two national payable through
processors), in part due to competitive concerns with having
local banks processing their checks.

With the enactment of the

Monetary Control Act of 1980, credit unions were able to obtain
their own routing numbers, and thus had greater processing
options.

In addition, other service providers began offering

share draft processing services to credit unions, including
correspondent banks, corporate credit unions, state credit union
leagues, credit union service organizations, regional data
processors, and service bureaus.
According to CUNA, the current trend is for credit

5One industry consultant indicated that "on average, 80
to 85% of [credit union] members will reorder [share drafts] in a
nine to twelve month period."
(July 13, 1988, affidavit of David
McCurrach, President of McCurrach & Company.)
Dearborn Federal
Credit Union, in a June 16, 1988 affidavit, noted that, if it were
to convert to local processing, it must either incur the costs of
reprinting share drafts for all of the credit union's members
(estimated at $7 per member), or incur the cost of operating a
full-scale dual processing system for one year while some members
are converting to new share drafts and others are using up their
old payable-through share drafts.

- 14 unions to shift to local processors or in-house processing.
CUNA reports that six percent of credit unions now process
in-house, while 25 percent use local processors in an intercept
arrangement, rather than a payable through arrangement.

(In an

intercept arrangement, the credit union uses its own routing
number on its checks, rather than the routing number of the
processor.)

The remaining 69 percent of credit unions use a

payable through bank for processing, a small portion of which
use a local payable through bank.
The proposed requirement would not necessarily preclude
nonlocal processing of payable through checks.

Currently,

arrangements exist whereby payable through checks are delivered
to a local presentment point and subsequently transported to the
nonlocal processing site.

For example, some corporate credit

unions serve market areas that encompass multiple check
processing regions, and thereby provide services to members
located in one or more nonlocal check processing regions.

Such

arrangements tend to be regional rather than national in scope
due to transportation times necessary to move the payable
through checks from the presentment point to the processing
site.

Thus, this proposal might cause a shift from national

payable through processing to regional or in-house processing.
On the other hand, national payable through processors could
develop regional operations in order to continue to provide

- 15 services to banks that issue payable through checks.6
The Board considered,, as an alternative to this
proposal, a proposal to require payable through checks to be
identified as such in the MICR line of the check.

There is only

one field in the MICR line (position 44) that such information
can be contained.

Because this field is also used to identify

checks, including payable through checks, for other purposes
(e.g., to identify the check as eligible for truncation), and
because the industry is interested in reserving the use of this
field for a number of other purposes, this alternative is not
attractive.

Moreover, this approach would only indicate to the

depositary bank whether the check is a payable through check; it
would not provide sufficient information to determine,

in an

automated environment, whether a payable through check is local
or nonlocal.
The Board is publishing for comment a proposed
amendment to Regulation CC to require bank payable through
checks to bear a routing number in the MICR line that is
associated with the same check processing region as the location
of the bank on which the check is written, and to require a

t r a v e l e r ’s Express, one of the two major national
payable through processors, has established three regional
processing centers in the past four years, and has stated that it
plans to establish additional regional processing sites in the
future, in order to retain credit union customers that are seeking
local processing.

presentment point for such checks in that check processing
region.

This requirement would be effective one year following

adoption of the amendment.

The Board specifically requests

comment on the cost savings to depositary banks and the costs to
banks using such checks so that the benefits and costs of this
proposal can be more fully assessed.
2.

Require bank payable through checks to be

conspicuously labeled with the name, location, and nine-digit
routing number of the bank on which the check is written and the
legend "payable through" followed bv the name and location of
the payable through bank.

In order for banks to be able to

separate payable through checks from other check deposits and
determine by visual inspection the appropriate hold, rather than
rely on the routing number encoded on the check to determine
availability, certain information pertaining to the payable
through bank and the bank on which the check is written must be
included on the check.

Commenters indicated that information on

the face of the check indicating the name and location of the
credit union and the legend "payable through" followed by the
name and location of the payable through bank is crucial to the
visual identification of these checks, although it would not
permit their identification by automated equipment.
addition,

In

10 commenters indicated that the assignment of

availability to these checks would be facilitated by requiring
the routing number of the bank on which they are written to be
included on the face of the check.

Furthermore, CUNA stated in

- 17 its submissions to the court that printing the name, address,
and first four digits of the routing number of the bank by which
the check is payable on the face of the check would be a
reasonable way to help depositary banks determine whether a
payable through check is local or nonlocal.
Inclusion of the routing number on the face of the
check would permit bank personnel to assign availability to
these checks without the need to refer to a list of cities and
towns in the depositary bank's Federal Reserve check processing
region to determine if the location of the bank on which the
check is written is local for purposes of Regulation CC.7

The

need for the routing number of the bank on which the check is
written to be printed on the face of bank payable through checks
would be eliminated if the Board adopts the requirement that all
bank payable through checks bear a local routing number

7An ancillary benefit to requiring that the nine-digit
routing number of the bank on which the check is written be printed
on the face of the check is that it would provide information
needed to establish arrangements for automated clearinghouse
transfers to or from an account at the bank on which the check is
written so that the ACH transfers would be sent to the bank on
which the check is written rather than to the payable through bank,
which generally rejects the transfer.
The bank routing number and
account number information that is necessary to establish an ACH
transfer arrangement is often obtained from a voided check supplied
by the bank customer.
If this information is obtained from a bank
payable through check, the routing number does not identify the
bank to which the ACH transfer should be directed, resulting in
problems for the payable through bank, the customer, the originator
of the payment, and the bank to which the ACH transfer should be
directed.

- 18 in the MICR line.

The other required information would still be

needed, even if the first proposal were adopted.

For example,

the name and location of the payable through bank may be needed
in those cases where the routing number on the check cannot be
properly read.8

Furthermore, the name of the payable through

bank and some indication that the check is payable through that
bank appears to be required by current law.9

The requirement

that specified information be printed on the face of the check
would not address the potential risks of bank payable through
checks becoming attractive vehicles for fraud.

If this proposal

were adopted, the bank on which the payable through checks are
written may incur costs to reissue its checks, if the checks
currently do not contain the required information.

Unlike the

first proposal, however, this proposal would not require any
bank to move its payable through check processing to a different
bank.
The Board is publishing for comment an amendment to
Regulation CC that would require bank payable through checks to

8The Federal Reserve Operating Circular on the
Collection of Cash Items and Returned Checks states that banks
should not send to a Reserve Bank for forward collection a check
that "does not state on its face the name and city and state
address of the paying bank associated with the routing number on
the item".
(Paragraph 7(e).)
9See
of Clovis. 92
and Phelan v.
N.E.2d 372, 4

U.C.C. § 3-120, Engine Parts. Inc. v. Citizens Bank
N.M. 37, 582 P.2d 809, 23 UCC Rep. Serv. 1248 (1978),
University National Ba n k . 85 111. App. 2d 56, 229
UCC Rep. Serv. 635 (1967).

conspicuously state the name and location of the payable through
bank and the bank on which they are written, as well as the
routing number of the bank on which they are written, and the
legend "payable through" on the face of the check.

If adopted,

this requirement would be effective one year following adoption
of the amendment.

The Board specifically requests comment on

the cost savings and operational benefits to depositary banks
and the costs to banks using such checks that would result from
the adoption of this proposal.
3.

Authorize direct presentment.

Currently, the law

is unclear as to whether a bank payable through check can be
presented directly to the bank on which it is written or whether
such checks must be presented to the payable through bank.

In

its Share Draft Operating Manual published in 1983, ICU
Services, a CUNA affiliate, states "the credit union management
has the right to refuse to accept a payable through share draft
which is presented directly to the credit union."

On the other

hand, the American Bankers Association ("ABA") commented that,
while old case law and Article 3 of the Uniform Commercial Code
("U.C.C.") might suggest that a payor bank may properly refuse
direct presentment of payable through checks, "it can be argued
that present section 4-204(2) of the UCC (which overrides
Article 3 of the UCC in the event of a conflict of provisions)
already authorizes collecting banks to send items directly to
the payor bajik."

The ABA also commented that even if some

depository institutions assert that they are "nonbank payors" in

- 20 order to avoid direct presentment under U.C.C.

§ 4-204(2)(a),

the Board has the power to promulgate regulations permitting
direct presentment under U.C.C. § 4-204(2)(c) and section
609(c)(1) of the Expedited Funds Availability Act.
Expressly permitting such checks to be presented
directly to the bank on which they are written would enable
banks to have such checks collected and returned locally, and
thus would avoid the delays in collection and return that occur
when the depositary bank sends the checks to nonlocal payable
through banks.

Although direct presentment of bank payable

through checks would not alleviate the operational burdens of
identifying these checks and assigning them the appropriate
availability,

it may reduce the likelihood that they would

become attractive vehicles for check fraud because depositors
could not rely on the longer collection and return times for
nonlocal checks.
If this proposal is adopted, the Federal Reserve Banks
may consider expanding their fine sort check collection service
to facilitate direct presentment of payable through checks to
the bank on which the checks are written.

Under this service,

collecting banks that want the Federal Reserve Bank to present
payable through checks directly to the bank on which they are
written, rather than to the payable through bank, would be
required to fine sort these checks according to the routing
number of the bank on which the checks are written.

The extent to which a rule expressly permitting direct
presentment of these checks to the bank on which they are
written would impose burdens on such banks is not clear.

These

banks generally already receive direct presentment of some
checks over the counter for their customers.

Further, the

extent to which the volume of checks presented directly would
increase is unknown.

The presentment of a significant number of

such checks may cause operational burdens for these banks
because they are generally not equipped to process large volumes
of checks.

The need for this rule would be diminished if bank

payable through checks were required to have a local routing
number in the MICR line, and a corresponding local presentment
point.
Th$ Board is publishing for comment an amendment to
Regulation CC that would authorize direct presentment of bank
payable through checks.

The Board specifically requests comment

on the cost and operational burden of this proposal on banks
that use payable through checks, the potential cost savings to
depositary banks, and the appropriate lead time for
implementation of the proposal,
4.
written.

if it is adopted.

Shift risk of loss to bank on which check is

One hundred eleven commenters expressed concern

regarding the potential risk of losses and increased exposure to
fraud for depositary banks as a result of the revised rule
defining the bank on which the payable through check is written
as the paying bank for determining funds availability.

Commenters argued that checks considered local for determining
availability should also be considered local for determining
whether the checks are returned expeditiously so that the risks
to depositary banks would not be increased by the revised rule.
These commenters suggested that the revised definition of paying
bank also be applied to the expeditious return rules in
Subpart C of the regulation.
The effect of the revision suggested by the commenters
can also be achieved by requiring that the bank on which a
payable through check is written bear any losses incurred by the
depositary bank due to return of a check from a nonlocal payable
through bank in a time longer than would have been required for
return of the check if it had been presented directly to the
bank on which it was written.

This rule would not address the

operational difficulties in identifying these checks and would
not protect the depositary bank from risks due to any longer
time required to present such checks to a nonlocal payable
through bank.

On the other hand, the burden that this rule

would place on banks on which such checks are written would be
minimal and would be limited to losses for which they were
responsible because of the location and return procedures of the
payable through bank that they selected.

The need for such a

rule would be eliminated if bank payable through checks were
required to have a local routing number in the MICR line and
would be diminished if direct presentment of payable through
checks were authorized.

- 23 The Board is publishing for comment an amendment to
Regulation CC that would place the risk of loss for return of
bank payable through checks from nonlocal payable through banks
on the banks on which such checks are written, to the extent
that the return from the nonlocal payable through bank took
longer than would have been required if the check had been
returned expeditiously by the bank on which it is written.

The

Board requests comment as to whether this allocated liability
should be computed solely under the two-day/four-day test in
§ 229.30(a)(1) of Regulation CC or whether it is possible to
also compute such liability under the forward collection test in
§ 229.30(a)(2).

The Board also requests comment on the

appropriate lead time for implementation of this proposal if it
is adopted.
SUMMARY OF PROPOSALS
These proposed amendments address many of the
operational and risk concerns raised by the commenters in
response to the revised rule adopted by the Board to treat bank
payable through checks as local or nonlocal based on the
location of the bank on which they are written rather than the
location of the bank through which they are payable.

The Board

is publishing for public comment, the following proposed
amendments to Regulation CC, to determine whether they would
facilitate compliance with Regulation CC and improve the check
system by speeding the collection and return of payable through
checks, and whether they would impose undue burdens on the banks
on which payable through checks are written.

- 24 1.

Require bank payable through checks to be

presentable locally and to bear a local routing number in the
MICR line [See proposed regulatory language —
§ 229.36(b),
2.

(f)

(Alternative 1), and (g)

amendments to

(Alternative 1)];

Require bank payable through checks to be

conspicuously labeled with the name, location, and nine-digit
routing number of the bank on which the check is written and the
legend "payable through" followed by the name and location of
the payable through bank [See proposed regulatory language —
amendment to § 229.36(g)

(Alternative 2).

Alternative 3

combines Alternatives 1 and 2];
3.

Authorize direct presentment to the bank on which

bank payable through checks are written [See proposed regulatory
language —

4.

amendments to § 229.36(b)

and (f)

(Alternative 2)];

Allocate losses for return of bank payable through

checks from a nonlocal payable through bank to the bank on which
such checks are written, to the extent the process of return
took longer than would have been required if the check had been
returned by the bank on which they are written [See proposed
regulatory language —

amendment to § 229.38(d)(2)].

In addition, elsewhere in today's Federal Register, the
Board is proposing for comment several other technical
amendments to Regulation CC relating to payable through checks
(see Docket R-0649).

SUMMARY OF COMMENTS
The Board received a total of 155 comments on the
interim rule.

The following table reflects these comments by

category of respondent:
Commercial Banks and BankHolding Companies*
Credit Unions
Savings and Loan Associations
Trade Associations
Individuals
*

129
3
12
8
3

Identical comments submitted by three employees of the same
bank are counted as one comment.
A total of 144 commenters opposed the definition of

paying bank as interpreted by the court decision.

Fifty-three

percent of the commenters urged the Board to appeal the court
ruling.

Ten commenters suggested that the Board should request

that Congress amend the law.

Five commenters concurred with the

revisions made in the interim rule.

The majority of the

commenters discussed the operational concerns and the increased
risk of fraud loss caused by the court ruling.

They indicated

the need for longer term initiatives aimed at easing the
operational burden of identifying payable through drafts and
minimizing the risk of fraud losses for depositary banks.
Operational Concerns.

A total of 89 commenters

expressed concern about the operational problems caused by the
ruling.

Banks will no longer be able to rely on the routing

number to determine whether a bank payable through check is
local or nonlocal.

Commenters stated that they will have

operational difficulties in assigning availability to payable
through checks.

They expressed concern that depositary banks

will have to revert to a complex manual process in order to

distinguish share drafts payable by local credit unions from
other checks for the purpose of determining availability.
Personnel will have to be trained to inspect each check visually
to determine whether the check is local or nonlocal.

Individual

handling and visual inspection will create a larger probability
of error and possibly cause delays in collection and return.
Commenters were also concerned that tellers would have
difficulty determining the availability of payable through
checks based on the geographic location of the credit union,
because most check processing regions contain only portions of
certain states.

Reference to a detailed listing of cities and

towns in the depositary bank's check processing region would
often be required to determine accurately whether a credit union
is local or nonlocal to the depositary bank.
Commenters stated that determination of holds on a
manual, rather than automated, basis would increase the expense
of processing deposits and would decrease the efficiency of the
processing, contrary to Congress' expressed intent in the Act
that the Board take steps to improve the check system.

Camden

National Bank, Camden, Maine, commented, "we are no longer in
the Stone Age of check processing where an individual examines
each item and sorts it.

We are a small bank; however we do our

own check processing and handle an average of 25,000 checks for
deposit nightly."
Ohio, stated,

The Huntington National Bank, Huntington,

"we process 20 million items per month on the

basis of the routing transit number; the time and expense of

sorting through these items by hand would be prohibitive."

The

commenters stated that the burden of identifying a local or
nonlocal check has been placed on the depositary bank without a
standard industry identification procedure.

The majority of the

commenters believe that the routing number should continue to be
the controlling determination for availability.

They referred

to the routing number method as efficient and proven.
Some commenters proposed initiatives to ease the
operational burdens created by the interim rule.

A few

commenters requested that the Board develop an alternative
method of identifying checks as local or nonlocal in an
automated check processing environment.

One commenter suggested

that the credit union should be required to encode a character
in the MICR line to identify the check as a payable through
check.
Ten commenters suggested that the credit union should
have its own routing number printed on the face of the check.
Commenters also recommended that, at a minimum, the credit
unions should identify their checks as payable through and
include their own name and address and the name of the payable
through bank on the face of the check.
A number of commenters suggested that a list should be
developed of the credit unions that use nonlocal payable through
banks.

Another alternative suggested was a list of routing

numbers for all payable through banks in each Federal Reserve
district.

- 28 Fifteen commenters recommended that the Board should
allow depositary banks to require the use of a special deposit
slip for payable through checks that are to be treated as local
items.

They noted that Regulation CC currently requires special

deposit slips for certain next-day items and suggested that the
same rules apply to payable through checks.

The special deposit

slips would make these items more easily identifiable for
tellers.
Risk of fraud loss.

One hundred eleven commenters

expressed concern regarding the potential risk of losses and
increased exposure to fraud for depositary banks.

They stated

that the interim rule will expose depositary banks that accept
share drafts for deposit that are payable by a local credit
union but payable through a nonlocal bank to additional risk
because such share drafts would not have to be returned as
expeditiously as local checks would normally be returned.

The

commenters indicated that most share drafts payable through a
nonlocal bank would not be received by the depositary bank
before funds must be made available under the local availability
schedule.

Home Loan Savings Bank, Fort Wayne, Indiana,

commented that "in the past, we have on many occasions,
experienced inordinate delays of from 12 to 18 days in the
return of local credit union share drafts payable through
distant nonlocal banks."

- 29 Commenters argued that checks considered local for the
purposes of determining availability should also be considered
local for determining whether the checks are returned
expeditiously.

They recommended that the revised definition of

paying bank be applied to the rules of Subpart C, in particular
the expeditious return rules, as well as the availability rules
of Subpart B.

They noted that this would also reestablish the

clear connection between the availability requirements and the
time required for a check to be cleared and returned.
Commenters also suggested that the credit union on which the
check is written should be responsible for any losses incurred.
American Bankers Association, Washington, D.C., stated:
To relieve the unfair risk imposed on banks in this
situation, we strongly recommend that the Board extend
the revised definition of paying bank to Subpart C
relating to the collection of checks.
The expeditious
return standard should be determined by the location of
the payor bank since that location determines whether a
local or nonlocal check funds availability schedule
applies.
Thirty-five commenters stated that the interim rule
promotes delayed disbursement.

They noted that the revised

definition of paying bank is inconsistent with the Federal
Reserve Board's proposal to restrict remote disbursement of
teller's checks and the Board's overall efforts to discourage
delayed disbursement.
Eight commenters recommended that the final rule
authorize direct presentment to credit unions that use payable
through checks.

They indicated that, under direct presentment,

depositary banks would have the option of collecting payable

- 30 through checks locally in those cases where local availability
must be provided, and thus would generally learn if a check has
not been paid prior to the time funds must be made available for
withdrawal.
Twenty-five commenters favored requiring a credit union
to use a local payable through bank.

They noted that this

requirement would reduce the risks to the depositary bank by
maintaining the clear link between the time it takes to collect
and return a check and the time within which the depositary bank
must make the funds available to the depositor.

They stated

that if the credit unions want their checks to be treated as
local they should be willing to use a local payable through
bank.

They also noted that this proposal would eliminate the

operational problems created by the interim rule, by enabling
depositary banks to rely on the routing number encoded on the
check to determine availability.
Miscellaneous issues.

Twenty commenters discussed the

additional disclosure requirements, with the majority of the
commenters opposing them due to the added cost to the depositary
bank, which would be passed on to bank customers.

These

commenters also indicated that these extra notices would create
additional confusion to their customers.

Further, some

commenters indicated that it was operationally difficult to
provide the added disclosures to their customers because of
printing backlogs and quarterly versus monthly statements.
American Bankers Association indicated that the proposed

The

disclosure requirement was generally an appropriate solution,
but suggested additional language that would be applicable to
those depositary banks that give availability of funds for all
checks within the local schedule.

Finally, some commenters

supported the time frame for disseminating the disclosures.
Eight commenters generally favored the bona fide error
proposal, but most asked that additional clarification be
provided in § 229.21(c).

Some commenters requested that "safe

harbor" procedures for determining whether a check is local or
nonlocal be identified or examples given with respect to the
type of procedure that would be considered reasonable.

Further,

other commenters believed the provision offered only limited
protection and suggested additional language so that depositary
banks relying on the list of routing numbers of payable through
banks compiled by the Federal Reserve would not be liable for
related mistakes.
One commenter indicated that it will maintain records
of any losses incurred as a result of the payable through
amendment and suggested that the Federal Reserve and other banks
monitor these matters carefully, so that appropriate action can
be taken if losses reach an unacceptable level.
One commenter indicated that the interim amendment was
not clear as to what type of checks, other than credit union
share drafts, were covered by the amendment, and requested that
a more precise identification be given.

- 32 One commenter was not in favor of the technical
revisions to Regulation CC that were made to conform other
provisions of the regulation to the payable through amendment.
This commenter requested that the Federal Reserve retain or
modify in different ways the provisions that contained
references to the use of the routing number versus the actual
location of the bank offering payable through checks.

INITIAL REGULATORY FLEXIBILITY ANALYSIS
The Regulatory Flexibility Act (12 U.S.C. 601-612)
requires an agency to publish an initial regulatory flexibility
analysis with any notice of proposed rulemaking.

Two of the

requirements of an initial regulatory flexibility analysis
(12 U.S.C. 603(b)), a description of the reasons why action by
the agency is being considered and a statement of the objectives
of, and legal basis for, the proposed rule, are contained in the
supplementary material above.

The proposed rules require no

additional reporting or record-keeping requirements nor are
there relevant federal rules that duplicate, overlap, or
conflict with the proposed rule.
Another requirement for the initial regulatory
flexibility analysis is a description of and, where feasible, an
estimate of the number of small entities to which the proposed
rule will apply.

The above supplementary material contains the

Board's best estimates of the number of institutions that use
payable through checks and that would therefore be affected by

- 33 the proposed rules.

Many of the affected institutions would be

small entities, generally credit unions, however the Board does
not have information on the sizes of all of the affected
entities.
The Board has included in its proposal several
alternative rules and is requesting comment on the cost and risk
associated with each alternative for all affected entities, both
large and small.

The Board has not, however, proposed an

exemption from coverage for small institutions that use payable
through checks.

The purpose of the proposed rules is to

alleviate the operational difficulties and risk associated with
the acceptance of payable through checks by depositary banks.
This purpose would be defeated if the rules did not apply to
small institutions that use payable through checks because the
operational and risk problems for their checks would remain.
List of Subjects in 12 CFR Part 229
Banks, banking; Federal Reserve System.
For the reasons set out in the preamble,

12 CFR Part

229 is proposed to be amended as follows:
PART 2 29 —

AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS

1.

The authority citation for Part 229 continues to

read as follows:
Authority:

Title VI of Pub. L. 100-86,
12 U.S.C. 4001 et seq.

101 Stat. 552, 635,

2.

In § 229.36, the heading is revised, paragraphs

(b)(3) and (b)(4) are revised, and new paragraphs (b)(5),

(f),

and (g) are added to read as follows:
§ 229.36 —

Presentment and issuance of checks.
*

*

*

*

*

(b) * * *
(3) At any branch or head office, if the bank is
identified on the check by name without address;
(4) At a branch, head office, or other location
consistent with the name and address of the bank on the check if
the bank is identified on the check by name and address; or
(5) In the case of a check that is payable by a bank
and payable through another bank,
(i) At a location to which delivery is requested by
the bank by which the check is payable;
(ii) At any branch
which the check is payable,

if

or head office of the bank by
that bank is identified by name

without address;
(iii) At any branch, head office, or other location
consistent with the name and address of the bank by which the
check is

payable,

name and

if that bank is identified on the check by
address; or

(iv) At any location described in paragraphs

(b)(l)

through (b)(4) of this section for the bank through which the
check is payable.

- 35 (e)

[Reserved]

ALTERNATIVE 1 .
(f) Presentment of payable through checks.
A check that is payable by a bank and payable through another
bank may be presented

for

payment

at any of the locations set

forth in paragraph (b)(5)(i)-(iii) of this section unless

the

routing number of the bank through which the check is payable is
associated with a location in the same check processing region
as the depositary bank,

in which case the check may only be

presented for payment at the location referred to in paragraph
(b)(5)(iv) of this section.
ALTERNATIVE 2 .
(f) Presentment of payable through checks.
A check that is payable by a bank and payable through another
bank may be presented

for

payment

at any of the locations set

forth in paragraph (b)(5) of this section.
ALTERNATIVE 1 .
(g) Issuance of payable through checks.
A bank that arranges for checks payable by it to be payable
through another bank shall require that the routing number
printed in magnetic ink characters on each check be associated
with an address in the same check processing region as the bank
by which the check is payable.

This provision shall be

effective [one year after its publication as a final rule], and
after that date banks that use payable through arrangements must
require their customers to use checks that meet the requirements
of this provision.

- 36 ALTERNATIVE 2 .
(g) Issuance of payable through checks.
A bank that arranges for checks payable by it to be payable
through another bank shall require that the following
information be printed conspicuously on the face of each check:
(1) the words "payable through" followed by the name
and location of the payable through bank; and
(2) the name, location, and nine-digit routing number
of the bank by which the check is payable.
This provision shall be effective [one year after its
publication as a final rule], and after that date banks that use
payable through arrangements must require their customers to use
checks that meet the requirements of this provision.
ALTERNATIVE 3 .
(g) Issuance of payable through checks.
A bank that arranges for checks payable by it to be payable
through another bank shall require that:
(1) the routing number printed in magnetic ink
characters on each check be associated with an address in the
same check processing region as the bank by which the check is
payable; and
(2) the following information is printed conspicuously
on the face of the check:
(i)

the words "payable through" followed by the

and location of the payable through bank; and

- 37 (ii)

the name and location of the bank by which the

check is payable.
This provision shall be effective [one year after its
publication as a final rule], and after that date banks that use
payable through arrangements must require their customers to use
checks that meet the requirements of this provision.

3.

In § 229.38, paragraph (d) is redesignated as

paragraph (d)(1), a new heading is added to paragraph (d), and a
new paragraph (d)(2) is added to read as follows:
§ 229.38

Liability.
*

*

*

*

*

(d) Responsibility for certain aspects of checks - (l) * * *
(2)

Responsibility for payable through checks.

case of a check that is payable by a bank and payable through a
paying bank located in a different check processing region than
the bank by which the check is payable, the bank by which the
check is payable is responsible for damages under paragraph (a)
of this section to the extent that the check is not returned to
the depositary bank through the payable through bank as quickly
as would have been required had the bank by which the check is
payable been the bank to which the check was sent for payment.
Responsibility under this paragraph shall be treated as
negligence of the bank by which the check is payable for
purposes of paragraph (c) of this section.
* * * * *

In the

- 38 4.

Appendix E —

Commentary to Part 229 is amended to

read as follows:
a.

Section 229.36 is amended by revising the second

paragraph of paragraph (b), by adding a new paragraph (b)(5)
immediately after paragraph (b)(4), and by adding new paragraphs
(f) and (g).
Appendix E —

Commentary
★

Section 229.36

*

*

*

★

Presentment and issuance of checks
* * * * *

(b) * * *
The paragraph specifies the locations at which checks
are considered received by the paying bank.

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.

If,

however, the payable through check is payable by a bank and sent
to that bank, the bank by which the check is payable is the
paying bank.
★ ★ * ★ ★
5.

If a check is payable by a bank and payable through
another bank, the check is considered received by the
paying bank upon delivery to any location described in
paragraphs 1, 3, or 4 above for the bank by which the
check is payable.

If such a check is sent to the

payable through bank for payment and therefore the
payable through bank’ is the paying bank with respect to
that check, it is also considered received by the
paying bank upon delivery to any location described in
paragraphs 1, 2, 3, or 4 above for the bank through
which the check is payable.
*

(e)

★

★

*

★

fReservedl

ALTERNATIVE 1 .
ff^

Presentment of payable through checks.

This paragraph authorizes a depositary or collecting bank to
present a check that is payable by a bank, and payable through
another bank, directly to the bank by which the check is payable
unless the check is payable through a local bank, in which case
the check must be presented to the local payable through bank.
ALTERNATIVE 2 .

(f )

Presentment of payable through checks.

This paragraph authorizes a depositary or collecting bank to
present a check that is payable by a bank, and payable through
another bank, directly to the bank by which the check is
payable.

A bank may also present such a check to the payable

through bank.

Presentment of such checks may take place at any

of the locations set forth in § 229.36(b)(5).
ALTERNATIVE 1 .
(q )

Issuance of payable through checks.

This paragraph provides that if a bank arranges for a check

- 40 payable by it to be payable through another bank, that check
must bear a routing number in its MICR line associated with an
address at which presentment may be made in accordance with
§ 229.36(b) that is in the same check processing region as the
bank by which the check is payable.

Under this requirement, the

check could bear the routing number of the bank by which it is
payable or the routing number of a local payable through bank.
The address associated with the routing number of the bank by
which the check is payable could function as an intercept point
from which the check could be forwarded to a nonlocal payable
through bank.
This provision takes effect one year after its
publication as a final rule.

The bank by which these checks are

payable is responsible for requiring its customers to meet the
new requirements after the effective date.
If a payable through check does not meet the
requirements of this paragraph, the bank by which the check is
payable may be liable to the depositary bank or others as
provided in § 229.38.

For example, a bank by which a payable

through check is payable could be liable to a depositary bank
that suffers a loss, such as lost interest or liability under
Subpart B, that would not have occurred had the check met the
requirements of this paragraph.

The bank by which the check is

payable may be liable for additional damages if it fails to act
in good faith.

- 41 ALTERNATIVE 2 .
fq)

Issuance of payable through checks.

This paragraph requires that if a bank arranges for a check
payable by it to be payable through another bank, that check
must contain conspicuously on its face the name, location, and
nine-digit routing number of the bank by which the check is
payable and the legend "payable through" followed by the name
and location of the payable through bank.
need not be in the MICR line.

The routing number

The required information is

presumed to be conspicuous if it is in a type not smaller than
six-point type.
This provision takes effect one year after its
publication as a final rule.

The bank by which these checks are

payable is responsible for requiring its customers to meet the
new requirements after the effective date.
If a payable through check does not meet the
requirements of this paragraph, the bank by which the check is
payable may be liable to the depositary bank or others as
provided in § 229.38.

For example,

a bank by which a payable

through check is payable could be liable to

a depositary bank

that suffers a loss, such as lost interest or liability under
Subpart B, that would not have occurred had the check met the
requirements of this paragraph.

The bank by which the check is

payable may be liable for additional damages if it fails to act
in good faith.

- 42 ALTERNATIVE 3 .
(q)

Issuance of payable through checks.

This paragraph provides that if a bank arranges for a check
payable by it to be payable through another bank, that check
must bear a routing number in its MICR line associated with an
address at which presentment may be made in accordance with
§ 229.36(b) that is in the same check processing region as the
bank by which the check is payable.

Under this requirement, the

check could bear the routing number of the bank by which it is
payable or the routing number of a local payable through bank.
The address associated with the routing number of the bank by
which the check is payable could function as an intercept point
from which the check could be forwarded to a nonlocal payable
through bank.
This paragraph also requires that if a bank arranges
for a check payable by it to be payable through another bank,
that check must contain conspicuously on its face the name,
location, and nine-digit routing number of the bank by which the
check is payable and the legend "payable through" followed by
the name and location of the payable through bank.
number need not be in the MICR line.

The routing

The required information

is presumed to be conspicuous if it is in a type not smaller
than six-point type.
This provision takes effect one year after its
publication as a final rule.

The bank by which these checks are

payable is responsible for requiring its customers to meet the
new requirements after the effective date.

If a payable through check does not meet the
requirements of this paragraph, the bank by which the check is
payable may be liable to the depositary bank or others as
provided in § 229.38.

For example, a bank by which a payable

through check is payable could be liable to a depositary bank
that suffers a loss, such as lost interest or liability under
Subpart B, that would not have occurred had the check met the
requirements of this paragraph.

The bank by which the check is

payable may be liable for additional damages if it fails to act
in good faith.
* * * * *
b.

Section 229.38 is amended by redesignating

paragraph (d) as paragraph (d)(1); by adding a heading for
paragraph (d); by adding a new paragraph (d)(2) to follow the
third paragraph of newly redesignated paragraph (d)(1); and by
revising the last paragraph of paragraph (d) to read as follows
Section 229.38

Liability
* * * * *

(d)

Responsibility for certain aspects of checks - (1) * * *
(2)

Responsibility for payable through checks.

paragraph provides that the bank by which a payable through
check is payable will be liable for damages under paragraph

(a)

to the extent that the check is not returned through the payabl
through bank as quickly as would have been required under
§ 229.3 0 had the check been sent to the bank by which it is
payable for payment.- This responsibility does not include

This

- 44 responsibility for the time required for the forward collection
of a check.

Responsibility under paragraphs (d)(1) and (d)(2) is treated as
negligence for comparative negligence purposes, and the
contribution to damages under paragraphs (d)(1) and (d)(2) is
treated in the same way as the degree of negligence under
paragraph (c) of this section.

By order of the Board of Governors of the Federal
Reserve System, October 25, 1988.

William W. Wiles
Secretary of the Board

FEDERAL RESERVE SYSTEM
[Docket No. R-064 3]
Regulation CC
12 CFR Part 229
Availability of Funds and
Collection of Checks
AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Final rule.

SUMMARY:

The Board is adopting as a final rule, with minor

technical changes, the interim amendment to Regulation CC it
adopted in August.

The Board adopted the interim rule to

conform the definition of "paying bank" in Regulation CC to the
Expedited Funds Availability Act as interpreted by a court
decision.

The court found that in defining a payable through

bank as the paying bank where a check is written on one bank but
payable through another, Regulation CC was inconsistent with the
language of the Act.
EFFECTIVE DATE:

October 25, 1988.

FOR FURTHER INFORMATION CONTACT:

Joseph R. Alexander, Senior

Attorney (202/452-2489), Stephanie Martin, Attorney
(202/452-3198), Legal Division; Louise L. Roseman, Assistant
Director, Division of Federal Reserve Bank Operations
(202/452-3874) ; Kathleen Brueger, Staff Attorney, Division of
Community and Consumer Affairs (202/452-2412).

For the hearing

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impaired only:

Telecommunications Device for the Deaf,

Earnestine Hill or Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
its Regulation CC —

On May 13, 1988, the Board issued

Availability of Funds and Collection of

Checks (12 CFR Part 229) to implement the Expedited Funds
Availability Act (the "Act")
FR 19373

(May 27, 1988).

(Title VI of Pub. L. 100-86).

53

In keeping with the Board's view that

the Act established a clear link between the time it normally
takes a check 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 through2 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.

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.
2 When 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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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.

The court granted the

plaintiffs' motion for summary judgment and invalidated
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 Act and Regulation CC took effect five weeks after
the court rendered its decision.

In order to clarify the duties

of banks and others in light of the court's order, the Board
issued temporary conforming amendments to Regulation CC.

The

Board also requested comment on the interim rules pending the
Board's consideration of a final rule.

53 FR 31290 (August 18,

1988).
The interim rule primarily affected the definitions and
the disclosure rules.

Where a check is payable by one bank but

payable through another bank, the interim rule provided that the
check would be considered local or nonlocal by reference to the

location of the payor bank, not by reference to the payable
through bank.

The interim rule did not affect payable through

checks payable by nonbank payors.

Further, as payable through

checks bear the routing number of the payable through bank, not
the payor, provisions in Regulation CC that allowed a depositary
bank to rely on the routing number to determine whether a check
is local or nonlocal were amended.

The interim rule also

permitted banks whose initial disclosures were affected by the
court's decision to comply with the Act by sending to their
customers simple clarifying notices in regularly scheduled
meetings.
Approximately 93 percent of the 155 comments the Board
received on the interim rule objected to the treatment of bank
payable through checks as local or nonlocal based on the
location of the payor bank, because the rule creates operational
difficulties and increases risks for depositary banks.

Many of

the commenters suggested means of addressing these operational
problems and risks.

In a related action today, the Board has

requested comment on several proposals to alleviate these
operational problems and risks.

(See Docket No. R-0648.)

After consideration of the comments, the Board has
determined to adopt in final form the interim rule with two
technical changes:
(1)

To insert the word "or" after the fourth element

in the definition of "paying bank," and

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(2)

Clarify in the disclosure rules and the Commentary

that a bank that makes funds available within the time periods
required for local checks is not required to make the special
disclosure.
List of Subjects in 12 CFR Part 229
Banks, Banking, Federal Reserve System.
Accordingly, the interim rule amending Regulation CC,
12 CFR Part 229, which was published at 53 FR 31290-31296 on
August 18, 1988, is adopted as a final rule with the following
changes:
PART 229 —
1.

AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS

The authority citation for Part 229 continues to read as

follows:
Authority:

Title VI of Pub. L. 100-86, 101 Stat. 552,

635; 12 U.S.C. 4001 et seq.
2.

Section 229.2(z)(4)

§ 229.2
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is revised to read as follows:

Definitions.

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(z)

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(4)

The bank through which a check is payable and

to which it is sent for payment or collection, if the
check is not payable by a bank; or
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§ 229.16
3.

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[Amended]

Section 229.16(b)(2)

is amended by adding after the first

sentence of the footnote the following new sentence to read as
follows:

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1 *

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A bank that makes funds from nonlocal

checks available for withdrawal within the time periods
required for local checks under §§ 229.11, 229.12, and
229.13 is not required to provide this disclosure on
payable through checks to its customers.
4.

Appendix E —

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Commentary to Part 229, is amended by adding

following the fourth paragraph of the Commentary to § 229.16(b)
a new paragraph to read as follows:
APPENDIX E —
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COMMENTARY

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SECTION 229.16
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SPECIFIC AVAILABILITY POLICY DISCLOSURES

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(b)

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Generally, a bank that distinguishes in its
disclosure between local and nonlocal checks based on
the routing number on the check must disclose to its
customers that certain checks, such as some credit
union payable through drafts, will be treated as local
or nonlocal based on the location of the bank by which
they are payable (e.g., the credit union), and not on
the basis of the location of the bank whose routing
number appears on the check.

A bank is not required to

provide this disclosure, however, if it makes the
proceeds of both local and nonlocal checks available

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for withdrawal within the time periods required for
local checks in §§ 229.11, 229.12, and 229.13.
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By order of the Board of Governors of the Federal
Reserve System, October 25, 1988.

William W. Wiles
Secretary of the Board