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Federal Reserve Bank
OF DALLAS
W IL L IA M
H. WALLACE
FIRST V IC E P R E S ID E N T
AND CH IEF O PER ATING O FFIC E R
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u U l y
I ,
DALLAS, TEXAS 75222
GOO
ly O O
Circular 88-43
TO:
The Chief Executive Officer of
all financial institutions in the
Eleventh Federal Reserve District
SUBJECT
Request fo r public comment on a proposed amendment to Regulation CC —
A v a ila b ility of Funds and Collection of Checks
DETAILS
The Federal Reserve Board has issued a request for public comment on a
proposed amendment to Regulation CC — Availability of Funds and Collection of
Checks to restrict certain delayed disbursement practices.
Delayed disbursement is the practice of delaying payment of a check by
drawing the check on a bank located in an area that is remote from the payee in
order to increase the time it takes to clear the check. These practices reduce the
efficiency of the check collection system and increase the risks to depositary
banks, which must meet the availability schedules of the Expedited Funds
Availability Act and Regulation CC.
The proposed rule, which would be effective April 1, 1989, would permit a
bankto issue an official check drawn on another bank only if a depositary bank
located in the same community as the issuing bank can receive credit for the check
as early as a check drawn on the issuing bank. Comment is also sought on several
additional questions related to delayed disbursement practices.
Your comments should be submitted by September 23, 1988, to Mr. William W.
Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th and C
Streets, NW, Washington, D.C. 20551.
ATTACHMENTS
The Board's notice is attached to provide additional background material.
M R INFORMATION
OE
For additional information, please contact Dean Pankonien at (214) 651-6662
Sincerely yours,
For additional copies of any circular please contact the Public A ffairs D epartm ent at (214) 6 5 1 -6 2 89 . Banks and others are
encouraged to use the follow ing incom ing W A TS numbers in contacting this Bank (800) 4 4 2 -7 1 4 0 (intrastate) and (800)
5 2 7 -9 2 0 0 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERAL RESERVE SYSTEM
12 CFR Part 229
[Regulation CC? Docket No. R-0639]
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 a proposed rule
amending its Regulation CC, Availability of Funds and Collection
of Checks (12 CFR Part 229).
The proposed rule addresses
problems connected with delayed disbursement practices by
setting out requirements for the issuance of teller's checks.
DATES:
Comments must be submitted on or before September 23,
1988.
ADDRESSES:
Comments, which should refer to Docket No. R-0639,
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:
Elliott C. McEntee, Associate
Director (202/452-3926), Louise L. Roseman, Assistant Director
(202/452-3874), Brada Panther, Analyst (202/452-2831), Division
of Federal Reserve Bank Operations, or Stephanie Martin,
Attorney, Legal Division (202/452-3198)? for the hearing
impaired only:
Telecommunications Device for the Deaf,
Earnestine Hill or Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
Background
Delayed disbursement is the practice of delaying
payment of a check by drawing the check on a bank1 located in
an area that is remote from the payee.
Delayed disbursement
practices are designed to increase the time it takes to clear a
check.
These practices reduce the efficiency of the check
collection system and increase the risks to depositary banks,
which must meet the availability schedules of the Expedited
Funds Availability Act ("Act")
Regulation CC.
(12 U.S.C. 4001-4010) and
Delayed disbursement increases the time for the
collection and return of a check as well as the costs to process
and transport the check, due to the increased likelihood that
the check must be processed through multiple intermediary
banks.
This delay may also result in a check being returned
after funds must be made available for withdrawal under the Act.
The Federal Reserve System has been concerned with the
problem of delayed disbursement for a number of years.
The
1|lBank" is defined in Regulation CC to include all
depository institutions. A "paying bank" is the bank that pays
the check and includes payable through and payable at banks. A
"depositary bank" is the bank in which the check is first
deposited.
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Board issued a policy statement on January 11, 1979, that
discouraged abuse of the check collection system through remote
disbursement.
The policy statement enumerated the Board's
principal concerns with respect to remote disbursement,
including the risk of loss to depositary banks and recipients of
remotely disbursed payments, denial to consumers and small
businesses of access to funds due them (a problem which has been
addressed, in part, by the Act and Regulation CC), and the
possibility of unsafe or unsound banking practices caused by
unsecured extensions of credit to customers whose funds at the
remote paying bank are not sufficient to cover the customer's
checks.
The Board stated that it believes the banking industry
has a public responsibility not to design, offer, promote, or
otherwise encourage the use of a service expressly intended to
delay final settlement and that exposes payment recipients to
greater than ordinary risks.
On February 23, 1984, the Board issued another policy
statement that further discouraged the use of arrangements that
result in a delay in the collection and final settlement of
checks.
In addition to reiterating the concerns expressed in
the 1979 policy statement, the Board stated that delayed
disbursement results in higher transportation and processing
costs and an increased possibility of check fraud.
The Board
also stated that it intended to monitor the success of voluntary
efforts to reduce and eliminate the use of delayed disbursement
arrangements and, if abuses continued, to pursue appropriate
action.
In conjunction with this policy statement, the Board
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implemented the High-Dollar Group Sort Program to reduce the
level of float and accelerate the collection of checks.
The Expedited Funds Availability Act evidences
Congress1 intent to speed the availability of funds to bank
depositors and, therefore, suggests that a reevaluation of
delayed disbursement practices is appropriate.
Although many
classes of checks are subject to delayed disbursement, the
ramifications of delayed disbursement are particularly
significant in the case of teller's checks.
Regulation CC requires a depositary bank to make the
proceeds of certain checks deposited in transaction accounts,
including cashier's checks, teller's checks,2 and checks drawn
on Federal Reserve Banks and Federal Home Loan Banks,
(collectively "official checks") available for withdrawal on the
business day following deposit, under specified conditions.
If
these checks are drawn on a remote paying bank, the depositary
bank may not receive credit for the check by the time funds must
be made available to the customer for withdrawal.
Thus, the
practice of delayed disbursement permits a depository
institution issuing such checks to impose costs, in terms of
lost interest, on other depository institutions and to retain
for itself interest earned on outstanding checks until the
checks are presented for payment.
A recent Federal Reserve Bank survey of official checks
Regulation CC defines "teller's check" as a check
provided to a customer of a bank or acquired from a bank for
remittance purposes, that is drawn by the bank, and drawn on
another bank or payable through or at a bank.
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indicates that approximately 60 to 80 percent of official checks
are deposited in a bank that is located in the same state as the
issuing bank.
Some banks issue official checks that are drawn
on a paying bank remotely located from the issuing bank.
In
these cases, the paying bank is often remotely located from the
depositary bank.
Prior to enactment of the Act, the Board*s ability to
address delayed disbursement abuses was limited to discouraging
such practices through policy statements, and through Federal
Reserve Bank services, such as the High-Dollar Group Sort
Program, which accelerates the collection of certain delayed
disbursement checks.
The Expedited Funds Availability Act
authorizes the Board to make improvements to the check system to
speed the collection and return of checks, and, thus, to
restrict delayed disbursement practices.
Specifically, the Act
gives the Board "the responsibility to regulate any aspect of
the payment system, including the receipt, payment, collection,
or clearing of checks; and any related function of the payment
system with respect to checks."
(12 U.S.C. 4008(c)(1).)
In December 1987, the Board requested public comment on
proposed Regulation CC as well as proposals for long-term
improvements to the check collection system.
A number of
commenters on the proposed Regulation CC cited the inequity of
requiring the depositary bank to make the proceeds of official
checks available for withdrawal on the business day after
deposit, if the bank cannot receive credit for the check by that
time.
Some commenters requested that the Board restrict the
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next-day availability requirement to checks for which the
depositary bank can receive credit within that time.
The Board specifically requested comment on how to
address delayed disbursement practices and the practice of
issuing official checks payable in a different check processing
region than the issuing bank.
The majority of commenters
addressing this issue indicated that the practice of issuing
official checks drawn on another institution located in a
different check processing region should be eliminated.
One
commenter noted that delayed disbursement of official checks may
have particular effects on deposits to escrow accounts used in
residential real estate closings.
Deposits to these accounts
are comprised predominantly of official checks that must be
accorded next-day availability, although the depositary bank
does not receive credit for a portion of these checks until a
later date.
The commenter noted that the later return of these
checks poses risks to the escrow companies.
Several other
commenters (all providers of official check services) opposed
any regulatory action to limit the location of the paying bank.
Despite the past policy statements of the Board,
certain delayed disbursement practices continue to be employed.
Many corporations and banks find delayed disbursement
attractive, because the timing of the presentment of the checks
they issue, and hence payment for these checks, is delayed,
giving the drawer of the check use of the funds needed to pay
the check for a longer period of time.
Delayed disbursement is
also very profitable to the banks that provide such services.
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These delayed disbursement practices, however, often
disadvantage the depositary bank that sends the check for
forward collection as well as the depositor of the check.
The
costs to the depositary bank are particularly high in the
case
of remotely disbursed checks that must be given next-day
availability under Regulation CC.
Delayed disbursement may also
pose additional risks to depositary banks.
Certain banks, particularly savings and loan
associations, credit unions, and small commercial banks, issue
teller's checks as official checks rather than issuing cashier's
checks (i.e., checks a bank draws on itself).
Some teller's
checks are subject to delayed disbursement, where the paying
bank is remote from the issuing bank in order to extend the time
within which the check is collected.
In some cases these checks
are drawn on a RCPC3 routing number, rather than a Reserve
Bank city routing number, further delaying the collection of
these items.
Many member savings and loan associations draw checks
on their accounts at Federal Home Loan Banks that are provided
to customers as the functional equivalent of teller's and
3"RCPC" checks are drawn on depository institutions
located in areas designated within the territories of Federal
Reserve offices but outside Federal Reserve cities.
"City"
checks are drawn on depository institutions located in the same
city as the processing Federal Reserve office. When deposited
for collection, RCPC checks generally must be deposited several
hours earlier than city checks in order to receive comparable
availability.
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cashier's checks.
In the case of Federal Home Loan Bank checks,
checks may be issued by a member of one Federal Home Loan Bank
and drawn on another Federal Home Loan Bank.
There are a number of reasons, other than delayed
disbursement, that banks may wish to issue teller's checks as
their official checks.
Due to specialization and economies of
scale, certain banks or other service providers can perform the
issuing, tracking, reconciliation, and payment services
associated with these payment instruments at a lower cost than
can the issuing bank itself.
These types of arrangements are
beneficial as long as they do not rely on delayed disbursement
to achieve the cost benefits.
Request for Comment
The proposed rule, which would be effective April 1,
1989, would amend § 229.36 of Regulation CC to provide that a
bank that issues a teller's check must draw the check on or
designate the check payable through or at a bank such that a
depositary bank in the same community as the issuing bank will
be able to receive credit for the check as early as if the check
were drawn on the issuing bank itself.
For the purposes of
Subpart C, a teller's check includes a check drawn on a Federal
Reserve Bank or a Federal Home Loan Bank.
The Board is also
publishing for comment a Board interpretation of the proposed
rule to be added to the official Commentary contained in
Appendix E of Regulation CC.
In addition, the Board requests
comment on the following issues:
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Does the proposed regulation unnecessarily disrupt
current correspondent relationships?
If so, in
what w a y (s )?
Should the Board require that official checks be
conspicuously identified by labeling them in a
certain way and by prohibiting the label on other
checks?
If yes, what specific requirements should
be imposed?
Should the Board require that the name of the
paying bank be printed prominently and in a
standardized location on the check?
Should the proposed regulation further define the
community in which the issuing bank is located?
Should the proposed regulation's standard for
equivalent availability be tied to specific
Reserve Bank deposit deadlines that are applicable
to checks to be presented in the paying bank's
community?
Should the proposed regulation's standard for
equivalent availability be expanded to cover
checks other than official checks?
Should the Board require official checks not drawn
on the issuing bank to be payable at multiple
presentment points?
Are the liability standards of Regulation CC,
Subpart C, appropriate for violations of the
proposed requirement?
9.
Should the proposed regulation's standard for
equivalent availability rule
provide an exception
for official checks that do not meet the
availability test, but that are likely to be
deposited at locations distant from the issuing
bank?
For example, several commenters asked that
the practice of issuing official checks drawn on a
New York city correspondent, regardless of the
location of the issuing bank, to remit funds to
foreign payees not be restricted.
Under what
circumstances should an exception apply?
10.
If banks in the issuing bank's community generally
do not collect checks through the Federal Reserve,
should the availability schedules of one or more
correspondent banks used by banks in that
community be used to determine whether the
proposed regulation's standard for equivalent
availability has been met?
Initial Regulatory Flexibility Analysis.
Of the items required to be contained in an initial
regulatory flexibility analysis by 5 U.S.C. 603(b), the first
("a description of the reasons why action by the agency is being
considered") and the second ("a succinct statement of the
objectives of, and legal basis for, the proposed rule") are
found elsewhere in this preamble.
The requirements of the proposed rule would apply to
all banks subject to the rule regardless of size.
The proposed
rule would affect any bank that issues a teller's check that
does not meet the equivalent availability standard of the rule;
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the Board anticipates that a number of small banks will be
affected by the rule.
The Board considered exempting very small
banks, those that fall below the threshold for filing reports of
deposit under the Board's Regulation D (12 CFR Part 204)
(currently those with deposits of less than $2.9 million) from
the rule's requirements.
If such an exemption were allowed,
however, small banks would continue to be able to engage in
delayed disbursement of teller's checks, and depositary banks,
which must make the proceeds of such checks available for
withdrawal according to the availability schedules of Regulation
CC, would incur additional costs and risk due to this practice.
The Board believes that the problems of delayed disbursement can
be addressed only if the proposed rule applies to all banks.
Because the proposed rule would only affect an issuing
bank's choice of the paying bank for its teller's checks, the
Board does not anticipate that the rule will impose significant
costs on small banks other than the costs of changing paying
banks and purchasing new check stock for those banks that do not
currently meet the equivalent availability standard.
The Board
does not anticipate that the proposed rule would impose extra
reporting or recordkeeping burdens on small banks.
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:
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1.
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.
The heading of § 229.36 is revised and a new
paragraph (e) is added to § 229.36 to read as follows:
§ 229.36 —
Presentment and issuance of checks.
*
(e)
Issuance
issue ateller's check
*
*
*
*
of teller's checks.
A bank shall not
if a depositary bank located in the same
community as the issuing bank would not normally receive credit
for the check as early as for a check drawn on the issuing bank.
3.
In Appendix E, the heading for Section 229.36 is
revised and a new paragraph (e) is added to Appendix E, Section
229.36 to read as follows:
Appendix E. —
Commentary
*
Section 229.36
requires
*
*
*
Presentment and Issuance of Checks
*
(e)
*
Issuance
*
*
*
*
of teller's checks.
that a bank that
This paragraph
issues a teller's check must draw the
check on or designate the check payable through or at a bank
such that a depositary bank in the same community as the issuing
bank will be able to receive credit for the check as early as if
the check were drawn on the issuing bank itself.
For the
purposes of Subpart C, a teller's check includes a check drawn
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on a Federal Reserve Bank or a Federal Home Loan Bank.
Two
banks are in the same community if they are in the same city,
town, or similar locality.
Under this rule, a bank in Atlanta
could issue a teller's check drawn on a New York bank only if an
Atlanta depositary bank would receive credit for that check as
promptly as it would for a check drawn on the issuing bank.
To determine whether a depositary bank in the same
community as the issuing bank would receive credit for the check
as early as it would for a check drawn on the issuing bank, an
issuing bank may look to the availability schedule and deposit
deadlines of the Federal Reserve Bank office that serves the
issuing bank.
The applicable deposit deadlines are the
deadlines banks in the issuing bank's community would normally
use to deposit checks drawn on the paying bank.
Thus, to
determine whether a teller's check meets the proposed rule's
equivalent availability test, the issuing bank must compare (1)
the availability its local Federal Reserve office provides for
checks drawn on the issuing bank and deposited at the deposit
deadline generally used by banks in the issuing bank's community
for collecting such checks, with (2) the availability that its
local Federal Reserve office provides for checks drawn on the
paying bank and deposited at the deposit deadline generally used
by banks in the issuing bank's community for collecting such
checks.
For example, if a Federal Reserve Bank provides credit
for checks drawn on a paying bank located in another Federal
Reserve district that are deposited by the local Reserve Bank's
Other Fed deadline at the same time as for checks drawn on the
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issuing bank that are deposited at the local Reserve Bank's RCPC
deadline (which is later than the Other Fed deadline), the
equivalent availability test would not be met if banks in the
issuing bank's community generally arrange their transportation
to the local Reserve Bank such that the checks arrive for
processing after the Other Fed deadline, but before the later
RCPC deadline.
In this example, depositary banks would receive
credit for checks drawn on the paying bank, located in another
Federal Reserve district, one day later than they would for
checks drawn on the issuing bank.
Most checks cleared outside the Federal Reserve System
are collected at least as quickly as checks collected through
the Federal Reserve System, and therefore the Federal Reserve
Bank collection times serve as reasonable proxies for collection
times generally.
Availability under the Federal Reserve's
High-Dollar Group Sort Program, however, may not be considered
in determining equivalent availability because, in many cases,
the collection times under this program are not matched by the
private sector, and therefore such availability does not serve
as an appropriate proxy for the normal collection time.
Moreover, the depositary bank must incur additional costs to
collect checks under this program.
An issuing bank that issues a teller's check for which
equivalent availability requirements are not met may be liable
to the depositary bank or others as provided in § 229.38.
For
example, an issuing bank could be liable to a depositary bank
that suffers a loss resulting from increased float or due to a
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late return of a check if the loss would not have occurred had
the check met the equivalent availability standard.
The issuing
bank may be liable for additional damages if it fails to act in
good faith.
Board of Governors of the Federal Reserve System, June
21, 1988.
(signed)
W i l l i a m W.
Wiles
William W. Wiles
Secretary of the Board
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@FedFRASER