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Federal R eserve Bank
OF DALLAS
WILLIAM H. WALLACE
F IR S T V IC E P R E S ID E N T

March 8, 1985

DALLAS, TEXAS 7 5 2 2 2

C ir c u la r 85-30

TO: The Chief Executive O f fi c e r of a l l
dep ository i n s t i t u t i o n s in the
Eleventh Federal Reserve D i s t r i c t

SUBJECT
Regulation J - Amendment to improve the system of notification for
nonpayment of checks of $2,500 or more
DETAILS
The Board of Governors of the Federal Reserve System has announced an
amendment to Regulation J to str en gthen the c u r r e n t requirement t h a t payor
depo sitory i n s t i t u t i o n s provide n otice when they are re tu rn i n g unpaid large
d o l l a r checks presented through the Federal Reserve. The Federal Reserve's
n o t i f i c a t i o n s e rv ic e also will be a v a i l a b l e to dep osito ry i n s t i t u t i o n s fo r
checks c o l l e c t e d outsi de the Federal Reserve.
The Federal Reserve Bank of Dallas and i t s Branch Offices will
continue to provide n o t i f i c a t i o n of nonpayment to the i n s t i t u t i o n of f i r s t
d ep o s it under the terms and cond itions of the Return Item p i l o t f o r the
duration of the p i l o t . The Eleventh D i s t r i c t also will make an enhanced
n o t i f i c a t i o n s e r v ic e a v a i l a b l e to dep osito ry i n s t i t u t i o n s f o r checks c o l l e c t e d
ou ts ide the Federal Reserve.

ATTACHMENTS
Attached are the Board's press r e l e a s e and the no tice as published in
the Federal R egister.

MORE INFORMATION
For f u r t h e r information on the amendment, please co n tact the
following in d i v i d u a l s : Robert L. Whitman, (214) 698-4357 a t the Head O ffi ce;
Robert W. Sch ultz, (915) 544-4370 a t the El Paso Branch; Vernon L. Bartee,
(713) 659-4433 a t the Houston Branch; or John A. Bullock, (512) 224-2141 a t
the San Antonio Branch.
S i ncerely yours

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)

For immediate r e l e a s e

February 8, 1985

The Federal Reserve Board today adopted an amendment t o Regulation J ,
governing checks, t o improve the system of n o t i f i c a t i o n f o r nonpayment of checks
of $2,500 or more t h a t are processed through th e Federal Reserve.
At th e same tim e, th e Board approved a proposal t o improve n o t i f i c a t i o n
s e r v i c e s of fe r e d by th e Reserve Banks as p a r t of th e check c o l l e c t i o n pro ce ss .
Both a c tio n s will become e f f e c t i v e in October 1985.
The Board's a c t i o n , in g e n e r a l , r e q u ire s a depo sitory i n s t i t u t i o n upon
which a la r g e d o l l a r check i s drawn (payor i n s t i t u t i o n ) t o n o t i f y t h e i n s t i t u t i o n
of f i r s t d ep os it within a s p e c i f i e d time l i m i t t h a t i t i s re tu rn in g the checks.
To a s s i s t payor i n s t i t u t i o n s in meeting t h i s requirement, Reserve Banks will en­
hance t h e i r c u r r e n t n o t i f i c a t i o n s e r v i c e .

An enhanced n o t i f i c a t i o n s e r v i c e will

a ls o be a v a i l a b l e t o depository i n s t i t u t i o n s f o r checks c o l l e c t e d ou ts ide the
Federal Reserve.

A fee schedule, r e f l e c t i n g th e estim ated co st of providing th e s e

s e r v i c e s , i s o u tl in e d in t h e attach ed document.
The Board's n o t ic e i s a tta c h e d .
-0 -

Attachment

5734

Federal Register / Vol. 50, No. 29 / Tuesday, February 12, 1985 / Rules and Regulations

FEDERAL RESERVE SYSTEM
12 CFR Part 210
[D o ck et No. R -0522]

Federal Reserve Bank Check
Collection System

Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
AGENCY:

The Board of Governors has
amended Regulation J to strengthen the
current requirement that payor
depository institutions provide notice
when they are returning unpaid large
dollar checks presented through the
Federal Reserve. The amendment
requires the payor institution to provide
timely notice to the depository
institution at which the check was
originally deposited that the check is
being returned unpaid. The Federal
Reserve Banks will enhance the
notification service they currently
provide to assist payor institutions in
meeting this requirement. The Federal
Reserve's notification service will also
be available to depository institutions
for checks collected outside the Federal
Reserve.
EFFECTIVE DATE: October 1,1985.
SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Elliott C. McEntee, Associate Director
(202-452-2231], or Bill Brown, Manager
(202-452-3760). Division of Federal
Reserve Bank Operations; Joseph R.
Alexander, Attorney (202-452-2489). or
Robert G. Ballen, Attorney (202-4523265), Legal Division, Board of
Governors of the Federal Reserve
System, Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION:

Background
Significant attention has recently been
focused on the issue of delayed
availability, that is, the practice of some
depository institutions of delaying a
depositor’s ability to withdraw funds
deposited by check for extended periods
of time. Although the risk of loss to
depository institutions associated with
returned items is relatively small in the
aggregate, many institutions point to the
potential losses they could incur on
particular returned checks as the reason

Federal Register / Vol. 50, No. 29 / Tuesday, February 12, 1985 / Rules and Regulations
for their delayed availability policies.
The Board, in conjunction with other
federal banking regulators, has urged
institutions to review their policies on
making funds available to customers
and to consider taking into account
factors that indicate the degree to which
a given situation presents a risk of loss.
(See joint release of Federal Financial
Institutions Regulators, March 22,1984.)
These factors include the length of time
the account has been maintained, the
past experience with the depositor, the
identity of the drawer, the type of check,
and the location of the payor institution.
The Board recognizes that many
institutions may be unwilling to modify
their hold policies unless some effort is
made to reduce what these institutions
believe is their exposure to potential
looses as a result of returned checks.
The Board believes that, at this juncture,
modification to the Federal Reserve’s
current requirement that payor
institutions provide notification when
they return unpaid large dollar checks
appears to be an effective way of
reducing risk to institutions of first
deposit. This reduction in risk will
permit depository institutions to
reevaluate the length of their hold
periods.
Current Requirement
Federal Reserve Bank operating
circulars currently required a payor
institution returning a check in the
amount of $2500 or more that has been
presented to it by a Reserve Bank to
provide a notification of nonpayment.
This notice is usually given to the
presenting institution, which is generally
the Reserve Bank. When the Reserve
Bank receives a notification from a
payor institution, the Reserve Bank
initiates a notification to the institution
that sent the check to the Reserve Bank
for collection.
The current procedure is not entirely
satisfactory for several reasons. Payor
institutions do not provide notification
in ail cases in which notification is
required in part because the Federal
Reserve has not indicated what liability
an institution incurs if it fails to provide
a notification. Moreover, there is no
requirement that the payor institution
notify the institution of first deposit
directly that the check is being returned
and the time period for providing
notification is not specified. As a result,
in some cases the returned check gets to
the institution of first deposit at the
same time as or before the notification.
Finally, even when a timely notice is
provided, it often does not contain
enough information to be helpful to the
institution of first deposit.

Proposed Notification Requirement
The Board proposed in June 1984 to
amend Regulation J to improve the
current notification requirement (49 FR
26597). Under the proposal, a payor
institution that does not pay a check of
$2500 or more that had been collected
through the Federal Reserve would be
required to provide notice of
nonpayment such that the notice is
received by the institution of first
deposit by midnight of the second
banking day following the day on which
the payor institution is required to
dishonor the check. The notification
would be required to include specific
information provided the payor
institution could determine the requisite
information from the check. The payor
institution could select among several
means of providing notice, including
providing notification by telephone or
returning the check such that it is
received by the institution of first
deposit before the notification deadline.
In this regard, the Reserve Banks would
enhance their current notification
service to assist payor institutions in
meeting the notification requirement,
(An enhanced Federal Reserve
notification service would be available
to depository institutions for all checks,
including those collected outside the
Federal Reserve. The Federal Reserve
would, however, continue not to handle
returned checks it did not originally
collect.) A payor institution that failed
to exercise ordinary care in providing
timely and accurate notification could
incur liability up to the amount of the
item for resulting losses incurred by the
institution of first deposit. In those cases
where the Reserve Bank agreed to
provide notification for the payor
institution, the Reserve Bank would
incur this liability rather than the payor
institution. The process by which the
physical item itself would be returned
would not, however, be affected by this
proposal.
Discussion and Analysis of Comments
Two hundred and sixty non-Reserve
Bank comments were received in
response to the Board's proposal, over
90 percent of which were from
depository institutions. One hundred
and fifty three (59 percent) of these
commenters supported the proposal#
Thirty, or approximately 60 percent, of
the comments received from large
correspondent depository institutions
and 67, or approximately 78 percent, of
the comments received from other
depository institutions supported the
proposal. Sixty four (25 percent) of the
commenters opposed the proposal.The
remaining 43 commenters (16 percent)

5735

did not specify whether they favored or
opposed the proposal.
Commenters favoring the proposal
indicated that the proposal would, at
minimal cost, result in a reduction in
losses incurred by depositing
institutions from returned checks and
check kiting, as well as improve funds
availability for customers of depository
institutions. In this regard, 75
commenters, or 44 percent of the
commenters commenting on this issue,
reported that the proposal would enable
depository institutions to improve their
delayed availability policies because
institutions would be able to protect
themselves from potential losses on
large dollar checks without imposing
extended holds on all*check deposits.
Commenters opposing the proposal
generally indicated that it would not
result in improvements in availability
because the notification requirement
would apply only to checks collected
through the Federal Reserve or because
they do not currently delay availability.
Accordingly, these commenters
concluded that the cost of this proposal
outweighed its benefits. Finally, many of
these commenters stated that other
approaches should be pursued, such as
speeding up the return of the physical
check through direct return to the
institution of first deposit or automation
of the return item process.
The Board believes that timely
notification of nonpayment will enable
the institution of first deposit to take
steps to protect itself from potential loss.
Such measures may include extending a
hold it may have placed on the account
or placing a hold on other funds of the
depositor. The Board also believes that
the proposal would provide significant
public benefits by providing depository
institutions the opportunity to make
funds available sooner to their
customers. Accordingly, the Board has
determined to adopt the notification
proposal.
Although the requirement would
initially apply only to checks collected
through the Federal Reserve, depository
institutions may voluntarily extend
notification to all checks of $2,500 or
more so as to simplify processing
operations. In this regard, the Federal
Reserve would make an enhanced
notification service available to
depository institutions for checks
collected outside the Federal Reserve.
Finally, the Board indicated that it
would support legislation to extend the
notification requirement to checks not
originally collected through the Federal
Reserve. (One hundred and twentyseven commenters, or 85 percent of the

5736

Federal Register / Vol. 50, No. 29 / Tuesday, February 12, 1985 / Rules and Regulations

commenters commenting on this issue,
strongly supported such legislation.)
The Board estimates that the proposal
will be less costly to the banking
industry compared to the current
notification requirement. (The proposal
will, however, result in modest cost
increases for depository institutions that
currently are not complying with the
notification requirement.) The proposal
will provide a number of cost savings as
compared to the current notification
requirement. The payor institution will
not be required to provide notice for
those checks that will be returned to the
institution of first deposit within the
notification deadline. Currently, a payor,
institution is required to provide notice
for all large dollar returned checks
collected through the Federal Reserve.
Moreover, intermediary collecting
institutions will realize cost savings
because they will no longer be required
to pass along notifications to their prior
endorsers. For these reasons, it is
estimated that the proposal will reduce
the number of required notifications for
payor and intermediary institutions by
half.
Several commenters suggested other
alternatives to improve the return item
process. While the Board expects the
notification requirement to improve the
return item process in the near term, it is
recognized that this is an interim
solution and further initiatives will be
required to achieve long-term
comprehensive solutions to the
processing of return items. These
initiatives are likely to include
development and implementation of
endorsement standards, assessment of
technology to substitute automation for
the largely manual handling of returns,
and consideration of means other than
telephone and wire to speed the flow of
payment information. In this regard, the
Dallas Reserve Bank has been
experimenting with enhancements to its
return item service that include
returning unpaid checks directly to
institutions of first deposit that are
located in the Dallas Reserve Bank’s
District.1
The Federal Reserve will continue to
take an active role in working with the
industry and Congress to pursue
improvements to the return item
process.
Recognizing that some check
processing equipment may not
accommodate certain endorsement
1 As part of this pilot, the Dallas Reserve Bank
currently is providing notification of nonpayment to
the institution of first d eposit The Reserve Bank
will continue to provide this notification under the
terms and conditions of the pilot for the duration of
the pilot.

standards and the difficulties of
ensuring compliance with an
endorsement standard, the Federal
Reserve also intends to work with the
industry to improve the quality of
endorsements and implement
endorsement standards. One hundred
and twenty-nine commenters, or 91
percent of the commenters commenting
on this issue, supported implementation
of an endorsement standard to assist the
payor institution in identifying, and
providing notice to, the institution of
first deposit.
Technical issues
A. Scope of the notification
requirement. Under the Board’s
proposal, the notification requirement
would apply to all cash items (e.g.,
checks), including items drawn on a
Reserve Bank and items presented
through a clearing house, in an amount
of $2,500 or more that were collected
through the Federal Reserve. It is
estimated that approximately one-third
of all checks written are collected
through the Federal Reserve. The
proposal would not apply to items
indorsed by, or for credit to, the United
States Treasury.
One hundred and thirty one
commenters, or 79 percent of the
commenters commenting on this issue,
agreed with the $2500 cut off in the
Board’s proposal. The current
notification requirement applies only to
checks in amounts of $2500 or more.
Moreover, such checks account for over
50 percent of the dollars associated with
returned checks but comprise only
approximately 2 percent of all returns.
For these reasons, the Board has
determined that the notification
requirement will apply only to checks in
amounts of $2500 or more. The impact of
the $2500 cut off will be evaluated over
time to determine the feasibility of
reducing the cut off. The same dollar cut
off will apply to all returned checks,
regardless of the reason for return, so as
to avoid unduly complicating the
notification requirement.
The Board believes that the
exemption in the proposal for checks
indorsed by, or for credit to, the United
States Treasury should be adopted.
Depository institutions typically do not
delay availability of funds represented
by checks indorsed by, or for credit to,
the United States Treasury. Morever, the
Board believes that this exemption
should be extended to checks drawn on
the U.S. Treasury. Checks drawn on the
U.S. Treasury are not returned for
insufficient funds. Moreover, if such
checks are returned for other reasons
(e.g., forged endorsement), the return
typically will occur long after the

expiration of any hold period imposed
by the institution of first deposit.
(Returned checks drawn on the U.S.
Treasury are not subject to the Uniform
Commercial Code’s (“U.S.C.”) time
limits concerning return.) Accordingly,
requiring notification of nonpayment of
checks drawn on the U.S. Treasury
serves little purpose because such notice
would not be given in a time frame to be
value to the institution of first deposit.
The Board believes that the
notification requirement should apply to
all other large dollar checks collected
through the Federal Reserve. An
exemption should not be provided for
checks returned for improper
indorsement, as suggested by six
commenters, because such checks also
represent a risk of loss to the institution
of first deposit that notification of
nonpayment could help avoid. For
example, such a risk of loss could occur
with an improperly indorsed check in
the case where one joint payee attempts
to obtain the funds represented by the
check without the permission of the
other joint payee(s).
B. Time by which notification must be

received by the institution of first
deposit. Under the Board's proposal, a
payor institution would be required to
provide notification of nonpayment such
that it is received by the institution of
first deposit by the second banking day
following the day on which the payor
institution is required to dishonor the
check. That is, if a Reserve Bank
presents a check to a payor institution
on Monday, that institution would be
required to determine whether to return
the check by midnight Tuesday and
would be required to provide a
notification of return such that it is
received by the institution of first
deposit by Thursday.
Sixty nine commenters, or 44 percent
of the commenters that commented on
this issue, agreed with the Board’s
proposal. These commenters believed
that this time period was necessary to
accommodate internal operations and to
permit the payor institution to take
advantage of the most cost effective
means of providing notice. Several of
these commenters indicated that a
shorter time period would result in
operational problems, particularly for
smaller depository institutions that
return checks through the U.S. mail or
have other entities (e.g., correspondent
banks or processing centers) process
their checks. On the other hand, 84
commenters, or 54 percent of the
commenters commenting on this issue,
believed that this time period should be
shortened by one day. These
commenters believed that it was

Federal Register / Vol. 50, No. 29 / Tuesday, February 12, 1985 / Rules and Regulations_____ 5737
feasible to provide the notification
within the shorter time frame and that
the sooner the institution of first deposit
received notification, the greater the
reduction in the loss exposure to
depository institutions and the sooner
funds could be made available to
customers.
The Board has determined to adopt
the proposed deadline in view of the
operational considerations raised by a
significant number of commenters
concerning the shorter deadline.
Accordingly, a payor institution that
determines to return a check collected
through the Federal Reserve is required
to provide notification such that it is
received by the institution of first
deposit by the payor institution’s second
banking day following the day the payor
institution is required to return the
check. The Board indicated that it
intends to evaluate this deadline over
time to determine whether it could be
shortened by one day after experience is
gained with the notification requirement.
Under the Board’s proposal, the
deadline for receipt of notice would be
established at midnight of the banking
day, rather than at the institution of first
deposit’s close of business. Eighty three
commenters, or 55 percent of the
commenters commenting on this issue,
agreed with the Board’s proposal. These
commenters indicated that they were
accustomed to the midnight deadlines of
the U.C.C. They stated that payor
institutions could not be expected to be
aware of the closing time of each
institution of first deposit. Furthermore,
a deadline based upon close of business
(e.g., 2:00 p.m.) would give West Coast
depository institutions only a few hours
to provide same day notification to East
Coast depository institutions. For these
reasons, the Board has determined to
require the payor institution to provide
notice such that it is received by
midnight of the second banking day
following the day on which the payor
institution is required to dishonor the
check.
The Board believes that it is
appropriate to base this deadline upon
time of receipt by the institution of first
deposit because it is that institution that
would take this information into account
in providing its customer with
availability by a date certain. (In many
cases, it would not matter whether the
deadline is established in terms of the
time the payor institution sends the
notice or the time the institution of first
deposit receives the notice because the
day upon which the notice is sent by the
payor institution and the day upon
which it is received by the institution of
first deposit will often be the same day.)

The Board expects that the institution of
first deposit will establish procedures to
ensure that the notification is brought to
the attention of the individual(s) at the
institution of first deposit responsible
for receiving such notice as quickly as
reasonably possible. Timely notification
that otherwise satisfies the notification
requirements would relieve the payor
institution from liability with regard to
the notice. The failure of the institution
of first deposit to ensure that the
notification is brought to the attention of
the responsible individual(s), would not
shift liability to a payor institution that
otherwise satisfies the notification
requirements.
C. Day upon which notification is

required is not a business day for the
institution of first deposit. Under the
Board’s proposal, if the day the payor
institution provides notice to the
institution of first deposit is not a
business day for that institution, receipt
of notice on the institution of first
deposit’s next business day would
constitute timely notice.
One hundred and forty-five
commenters, or 98 percent of the
commenters commenting on this issue,
agreed with the Board’s proposal. These
commenters indicated that the
institution of first deposit would not
release funds to its customers on a non­
business day even if it received notice
on that day. Accordingly, the Board has
detemined that if the day the payor
institution is required to provide notice
to the institution of first deposit is not a
business day for the institution of first
deposit, receipt of notice on the
institution of first deposit’s next
business day consititutes timely notice.
Four commenters suggested that if the
next business day for the institution of
first deposit is not also a business day
for the payor institution, the payor
institution should not be required to
provide notice until the next day that is
a business day for both the payor
institution and the institution of first
deposit. It will be quite uncommon for
the institution of first deposit’s next
business day to not also be a business
day for the payor institution. In those
rare instances where this day is not a
business day for the payor institution,
the payor institution could use another
entity to provide notice on that day. In
addition, the payor institution also
would have the option of providing the
notification to the institution of first
deposit on the day prior to its closing.
For these reasons, the Board has
detemined to require the payor
institution to provide notice-to the
institution of first deposit on the
institution of first deposit’s next

business day, regardless of whether that
day is also a business day for the payor
institution.
D. Information to be provided in the
notification. The Board’s proposal
required the payor institution to provide
the following information: (1) The name
of the payor institution; (2) the name of
the payee; (3) the amount of the check;
(4) the reason for return; (5) the date of
the indorsement of the institution of first
deposit; (6) the account number of the
depositor; (7) the branch at which the
check was first deposited; and (8) the
trace number on the check of the
institution of first deposit.
One hundred and six, or 97 percent of
the commenters commenting on this
issue, stated that the information
specified in the Board’s proposal would
be useful to the institution of first
deposit. Accordingly, the Board has
determined that the payor institution is
required to provided in the notification
the information specified in the proposal
provided it, exercising ordinary care and
acting in good faith, is able to determine
such information from the check itself.
For example, the account number of the
depositor, the branch at which the check
was deposited and the trace number on
the check could be provided in the
notification only if the institution of first
deposit had placed such information on
the check. In those cases in which
another entity provides notice for the
payor institution, the payor institution
would of course be required to provide
that entity with information concerning
the indentity of the institution of first
deposit.
Several commenters suggested
additional information not included in
the Board’s proposal that would also be
useful to the institution of first deposit.
After evaluating these suggestions, the
Board has determined to encourage, but
not require, the payor institution to
include the following information in the
notification: (1) The drawer of the check
(name and account number); (2) the
number of the check; (3) the date of the
check; (4) the last non-depository
institution indorser if different from the
payee; and (5) any other information
that the payor institution believes might
be useful to the institution of first
deposit. The requirements as to the
information to be included in the
notification will be uniform amoAg all
Reserve Banks.
E. Method of providing notification.
Under the Board’s proposal, the payor
institution could select among several
means of providing notice, including
providing notification by telephone or
returning the check such that it is
received by the institution of first

5738

Federal Register / Vol. 50, No. 29 / Tuesday, February 12, 1985 / Rules and Regulations

deposit before the notification deadline.
Virtually all of the commenters
commenting on this issue supported the
options provided to the payor institution
for satisfying the notification
requirement.
Accordingly, the Board has
determined to permit the payor
institution to use any means to satisfy
the notification requirement. For
example, the payor institution could
return the unpaid check such that it is
received by the institution of first
deposit by midnight of the second
banking day following the payor
institution’s midnight deadline for
dishonor of the check. This alternative
would generally be feasible when the
payor institution is returning a check to
a nearby institution of first deposit,
either directly or perhaps through a local
clearing house. The payor institution
could also itself provide a notification
directly to the institution of first deposit.
The notice could be given by telephone
or other telecommunications networks
such as Bankwire, SWIFT, Telex or the
Federal Reserve’s Communications
System, which would pass the message
on to the institution of first deposit. The
payor institution could also provide its
Reserve Bank, such as by telephone,
with all of the required information
concerning the unpaid check. The
Reserve Bank would then advise the
institution of first deposit that the check
is being returned and provide it with the
appropriate information. For checks
collected through the Federal Reserve, a
payor institution could return the check
to the Reserve Bank with instructions
that the Reserve Bank initiate a
notification to the institution of first
deposit. The Reserve Bank would then
provide the appropriate information on
the check to the institution of first
deposit.
Institutions exercising either of these
latter two options will be required to
provide the information or the check (as
the case may be) to the Reserve Bank in
advance of the time by which
notification will have to be received by
the institution of first deposit. These
deadlines will be specified in the
Reserve Banks' operating circulars.
In cases where the Federal Reserve
initiated the notification or the payor
institution initiated the notification
through the Federal Reserve’s
Communications System, the
notification would follow a standard
format that will be developed well in
advance of the implementation date. In
addition, the Federal Reserve will work
with the industry to develop a standard
format for notifications that could be
used regardless of whether the

notification is made through the Federal
Reserve or through other means.
When the payor institution makes use
of the Federal Reserve’s notification
service, the institution of first deposit
will be able to specify to the Reserve
Bank whether the institution desires to
receive notification of dishonor via the
telephone or the Federal Reserve’s
Communications System. The institution
of first deposit will also be to specify the
department (or other entity) that should
receive the notice. Moreover, in those
cases in which the Reserve Bank gives
the notification, the Reserve Bank will
retain documentation of the notification
for the time period within which the
institution of first deposit must initiate
action concerning the notification of
nonpayment and will provide this
documentation to the payor institution
upon request.
The Reserve Banks will develop
procedures to ensure that they do not
erroneously send a second notice in
those cases in which the payor
institution has itself provided notice and
returned the check to the Federal
Reserve for collection. For example,
each Reserve Bank may require each
payor institution in advance to notify
the Reserve Bank whether the institution
wants the Reserve Bank to provide
notification on all or none of the
institution's return items.
The Board proposed to charge the
payor institution, rather than the
institution of first deposit, for these
enhanced notification services because
the Reserve Bank is assisting the payor
institution in fulfilling its responsibility
to provide notification and because its
customer is usually responsible for the
returned check. Although the institution
of first deposit does enjoy benefits from
the notification, as asserted by a few of
the commenters, the Board continues to
believe it to be appropriate to charge the
payor institution for the reasons
indicated in the proposal.
The Board proposed that a three
tiered fee structure apply to the services
offered by the Reserve Bank. If the
institution provides notification through
the use of an on-line Fedwire message, a
fee of $2.25 per advice would be
charged. This fee is based upon the
estimated cost of providing the service,
including any notification that the
Reserve Bank must make by telephone
to the institution of first deposit. If the
payor institution provides the
information, such as by telephone, to the
Reserve Bank and requests it to provide
the required information to the
institution of first deposit, a fee of $4.25
per advice would be charged. This fee
reflects additional labor and other costs

involved in transcribing the information
provided by the payor institution.
Finally, if the payor institution returns a
check collected through the Federal
Reserve to the Reserve Bank with
instructions to provide notification to
the institution of first deposit, a fee of
$4.25 would be charged. This fee
includes the costs of processing, reading
the indorsements, initiating the wire
advice, and other costs.
Five commenters stated that the
Federal Reserve’s fees should be costjustified. As indicated above, the
proposed fees are established to recover
the projected cost of providing the
service. These fees have been based
upon projected volumes and experience
with the cost of providing similar
services. Accordingly, the Board has
determined to adopt the fees as
proposed. The Board intends to review
these fees at the time it reviews the fee
schedule for the Federal Reserve’s check
collection services and adjust the fees
for the notification service, if necessary,
to ensure that they continue to reflect
the cost of providing the service. In the
interest of maintaining a simple fee
structure, the Board has determined not
to adopt different fees depending upon
whether the notification is being sent to
an on-line or off-line institution as
recommended by three of the
commenters.
F. Permitting or requiring institution

of first deposit to specify to the payor
institution the department or entity to
receive notice. Under the Board’s
proposal, the institution of first deposit
would not be required to specify to the
payor institution the department or
entity to receive the notice. The Board’s
proposal was, however, silent as to
whether the institution of first deposit
would be permitted to specify to the
payor institution this information.
Eighty one commenters, or 84 percent
of the commenters commenting on this
issue, opposed requiring the institution
of first deposit to specify to the payor
institution where notice should be sent.
Sixty eight commenters, or 54 percent of
the commenters commenting on this
issue, opposed permitting the institution
of first deposit to specify to the payor
institution where notice should be sent.
These commenters indicated that
placing this information on the check
would clutter the check and further
complicate the reading of endorsements.
These commenters stated that requiring
the payor institution to look beyond the
check for this information would be
unduly complicated and costly,
particularly in view of the rapid rate
that this information would be updated
and revised. Moreover, the institution of

Federal Register / Vol. 50, No. 29 / Tuesday, February 12, 1985 / Rules and Regulations
first deposit should easily be able to
route the notification to the appropriate
area. For these reasons, the Board has
determined that the institution of first
deposit will not be required or permitted
to specify to the payor institution the
department of the institution (or other
entity) that must receive the notification.
Similarly, the Board believes that it is
not necessary to specify in the
regulation the area of the institution of
first deposit to be notified (e.g., Return
Item Unit).
As indicated above, the institution of
first deposit would be able to specify to
its Reserve Bank the department or
entity to receive the notice. Similarly, a
payor institution could agree with a
particular institution of first deposit to
provide the notice as directed by the
institution of first deposit. The Board
encourages bank directories to include
information to assist the payor
institution in providing notice.
G. Institutions of first deposit located
outside the United States. Three
commenters questioned how the
notification requirement would apply if
the institution of first deposit were
located outside the United States. The
Board believes that it would be an
inordinate burden for the payor
institution to provide notification to
institutions of first deposit located
outside the United States. Accordingly,
in such cases, the payor institution
should provide notification to the
depository institution in the United
States that first handled the item.
H. Cancellation of a previous
notification. Five commenters raised
questions concerning the case in which
the payor institution provides
notification but subsequently decides to
pay the check. The Board has
determined to adopt the suggestion of
one of the commenters and require a
payor institution that determines not to
return a check subsequent to the
provision of a notice of nonpayment to
send a second notification as soon as
reasonably possible cancelling its
previous notification of nonpayment.
This second notification should indicate
that it is a second notification that is
cancelling a previous notification of
nonpayment. It should also contain
sufficient information to enable the
institution of first deposit to match this
second notification with the previous
notification of nonpayment.
I. Liability for failure to comply with
notification requirement. Under the
Board’s proposal, a payor institution
that failed to exercise ordinary care in
complying with the notification
requirement would be liable for losses
incurred by the institution of first
deposit up to the amount of the item if

the loss would have othenyise been
avoided had the payor institution
exercised ordinary care. A payor
institution that failed to act in good faith
(i.e., failure to exercise honesty in fact)
in complying with the notification
requirement would be liable for
consequential damages. (These are the
same liability standards as are
contained in the U.C.C. Indeed, several
courts already have applied this
standard in cases involving the failure of
a payor institution to provide
notification of return.) Similarly under
the proposal, in cases where the Reserve
Bank assists the payor institution in
providing notification, the Reserve Bank
would be liable for a loss incurred by
the institution of first deposit up to the
amount of the item if the loss would
have otherwise been avoided had the
Reserve Bank exercised ordinary care in
providing the notification. Accordingly,
if the payor institution returns the check
to the Reserve Bank in accordance with
established deadlines and requests the
Reserve Bank to initiate the notification,
the Reserve Bank would incur the same
liability to the institution of first deposit
under the proposal as would the payor
institution.
One hundred and forty commenters,
or 93 percent of the commenters
commenting on this issue, supported the
Board’s proposal. These commenters
indicated that incorporating the same
liability standards as are prescribed in
the U.C.C. will result in the immediate
application of an existing body of case
law; thereby obviating the necessity of
litigating the meaning of the language
employed. Accordingly, the Board has
determined to adopt the standards of
liability as proposed.
Fourteen commenters suggested that
the Board should specify how these
standards of ordinary care and good
faith would apply in the context of the
notification requirement (e.g., should
there be liability if the failure of the
payor institution to provide notification
was due to an act of God or computer
down time). Regulation J currently
provides a bank with an extension from
the requirements in the regulation if the
delay in complying is due to an
interruption of communication facilities,
war, emergency conditions or other
circumstances beyond the bank’s
control. The Board does not believe that
it would be appropriate to specify
further how the standards of ordinary
care and good faith would apply in
particular factual circumstances
because the factual circumstances
cannot be anticipated prior to actual
occurances and this task is more
appropriately performed by the courts.

5739

The commenters were evenly split on
whether the institution of first deposit, if
it prevails in litigation, should be able to
reoBver its court costs and reasonable
attorneys’ fees from the payor
institution. The Board has determined
that the institution of first deposit
should be permitted to recover such
costs to facilitate the recovery by the
institution of first deposit of its
economic loss (particularly for smaller
institutions). However, so as not to
unduly disadvantage the payor
institution, the Board has adopted the
suggestion of two commenters to permit
the payor institution to recover its court
costs and reasonable attorneys’ fees if it
prevails in litigation. (The costs of inhouse counsel should be based upon the
actual costs incurred by the party.)
Under the Board’s proposal, only the
payor institution would be required to
provide notification of nonpayment. One
commenter recommended that an
institution to whom a check is presented
for payment be required to provide
notification even if that institution is not
the payor institution. This commenter
suggested that this would help alleviate
the recent problem of MICR fraud (i.e..
the intentional altering of a check so
that it indicates one or more fictitious
payor institutions in order that its
collection and return be delayed beyond
expiration of the institution of first
deposit’s availability of funds hold). The
Board has determined not to adopt this
suggestion because it would be unfair to
impose this duty, and presumably
liability for any failure to meet this duty,
on an institution that is involved only
because a malefactor identified the
institution, without its consent or
knowledge, as a party on the check.
Similarly, intermediary collecting
institutions would not have any
responsibilities concerning the
notification of nonpayment. This would
be true even if an intermediary
institution mistakenly receives a
notification of nonpayment.
Four commenters raised the issue of
whether the institution of first deposit is
required to pass on the notification to its
customer. The Board believes that this is
an issue most appropriately left to
agreement between the institution of
first deposit and its customer given that
the needs of each will vary from case to
case. Accordingly, the rule adopted by
the Board does not require the
institution of first deposit to pass along
the notification to its customer.
Several commenters raised questions
concerning how the liability provisions
of the notification requirement would
overlap with existing requirements in
the U.C.C. The Board believes that it

5740

Federal Register / Vol. 50, No. 29 / Tuesday, February 12, 1985 / Rules and Regulations

would be possible to have duplicative or
overlapping liability if the payor
institution failed to comply with the
notification requirement and another
depository institution failed to comply
with the U.C.C’8 requirements
concerning the return of the physical
check. Similarly, the failure of the payor
institution to satisfy the notification
requirement should not defeat the
claims that the institution otherwise
would have against the institution of
first deposit for breach of warranty.
One commenter asked what statute of
limitations applied to the institution of
first deposit’s claim against the payor
institution for failure to comply with the
notification requirement. This question
will be addressed separately in the
context of Regulation J as a whole.
As discussed above, a Reserve Bank
that provides a notification on behalf of
the payor institution would incur the
same liability as woud be applicable to
the payor institution had it itself
provided the notification. Accordingly,
the Board believes that it would be
appropriate, as suggested by one of the
commenters, for the Reserve Bank to
indemnify the payor institution for any
claim brought against it by the
institution for first deposit that resulted
from the Reserve Bank’s failure to
exercise ordinary care or failure to act
in good faith in providing the notice.
Similarly, the payor institution is to
indemnify the Reserve Bank for any
claim brought against it by the
.
institution of first deposit that resulted
from the payor institution’s failure to
exercise ordinary care or failure to act
in good faith.
J. Implementation date. Several
commenters indicated that a substantial
lead time was necessary to establish
procedures, train personnel, improve
indorsements; and work for legislation
to apply the notification requirement to
all checks. Accordingly, the Board has
determined that the new notification
requirement be effective on October 1,
1985.
The impact of this amendment to
Regulation J on small entities has been
considered in acordance with the
Regulatory Flexibility Act (Pub. L. 96354; 5 U.S.C. 604). The amendment
should not result in a significant burden
on small depository institutions because
all depository institutions currently are
required to provide notification of
nonpayment of checks of $2500 or more
collected through the Federal Reserve.
That is, a payor institution currently is
requried to incur the cost of providing
notice of nonpayment of such checks to
the presenting institution. Under the
amendment, a payor institution will be
required to provide this notice of

the time limits specified in this
subparagraph.
(3) The information contained in the
notice shall include the name of the
paying bank, the name of the payee, the
amount of the item, the reason for
return, the date of the indorsement of
the depositary bank, the account
number of the depositor, the branch at
which the item was first deposited, and
the trace number on the item of the
depositary bank, and should otherwise
be in accordance with uniform
standards and procedures specified by
the operating circular of the paying
bank’s Reserve Bank. A paying bank is
List of Subjects in 12 CFR Part 210
not required to provide any information
in the notice that it, after exercising
Banks, Banking, Federal Reserve
ordinary care and acting in good faith, is
System.
not able to determine with reasonable
Pursuant to its authority under section
certainty from the item itself.
13 of the Federal Reserve Act, (12 U.S.C.
(4) A paying bank is not required to,
342); section 16 of the Federal Reserve
but may voluntarily, provide notice to
Act (12 U.S.C. 248(o), 360); and section
the department of the depositary bank
11 (i) of the Federal Reserve Act (12
or other entity specified by the
U.S.C. 248(i)), the Board has amended 12
depositary bank to receive the notice.
CFR Part 210 (Regulation J), effective
(5) If a paying bank provides a notice
October 1,1985, as follows:
pursuant to subparagraph (1) of this
paragraph and subsequently determines
PART 210—[AMENDED]
to pay the item, the paying bank shall
provide to the depositary bank a second
In § 210.12, the last sentence of the
notice as soon as reasonably possible.
section is designated as paragraph (d),
This second notice should indicate that
and new paragraph (c) is added after
it is a second notice that is cancelling a
paragraph (b) to read as follows:
previous notice and should contain
§ 210.12 Return of cash Items.
sufficient information to enable the
*
*
*
*
*
depositary bank to match the second
(c) Notification of Nonpayment. (1) A
notice with the previous notice.
paying bank that receives a cash item in
(6) A paying bank that fails to
the amount of $2500 or more directly or
exercise ordinary care in meeting the
indirectly from a Reserve Bank and
requirements of this paragraph shall be
determines not to pay it shall provide
liable to the depositary bank for losses
notice to the first bank to which the item incurred by the depositary bank, up to
was transferred for collection
the amount of the item, reduced by the
(“depositary bank”) that the paying
amount of the loss that the depositary
bank is returning the item unpaid. If the
bank would have incurred even if the
depositary bank is not located in a state, paying bank had used ordinary care. A
the paying bank shall provide the notice
paying bank that fails to act in good
to the bank located in a state that first
faith in meeting the requirements of this
handled the item for collection.
paragraph may be liable for other
(2) The paying bank shall provide the damages, if any, suffered by the
depositary bank as a proximate
notice such that it is received as
consequence. If the paying bank or the
specified by the operating circular of the
depositary bank prevails in litigation
paying bank’s Reserve Bank by the
involving the requirements of this
depositary bank by midnight of the
paragraph, it may recover its court costs
second banking day of the paying bank
and reasonable attorneys’ fees. A
following the deadline for return of the
paying bank shall not be liable for
item as specified in paragraph (a) of this
mistake, neglect, negligence,
section. If the day the paying bank is
misconduct, insolvency or default of any
required to provide notice to the
depositary bank is not a banking day for other bank or other person in connection
with providing notice under this
the depositary bank, receipt of notice on
paragraph.
the depositary bank’s next banking day
(7) Notwithstanding the provisions of
shall constitute timely notice under this
section 210.6 of this subpart, a Reserve
paragraph. Notice may be provided
Bank that fails to exercise ordinary care
through any means, including return of
in undertaking to provide the notice
the cash item so long as the cash item is
required in this paragraph on a paying
received by the depositary bank within

nonpayment directly to the institution of
first deposit rather than to the
presenting institution. As discussed
above, it is estimated that the proposal
will reduce the costs for smaller payor
depository institutions as compared to
the current notification requirement by
reducing the number of required
notifications. Moreover, the Reserve
Banks will provide an enhanced
notification service which will reduce
any operational effect this action may
have. Finally, the amendment imposes
no new reporting or recordkeeping
requirements on depository institutions.

Federal Register / Vol. 50, No. 29 / Tuesday, February 12, 1985 / Rules and Regulations
bank’s behalf shall be liable to the
depositary bank for losses incurred by
the depositary bank, up to the amount of
the item* reduced by the amount of the
loss that the depositary bank would
have incurred even if the Reserve Bank
had used ordinary care. A Reserve Bank
that fails to act in good faith in
undertaking to provide the notice
required in this paragraph on a paying
bank’s behalf may be liable for other
damages, if any, suffered by the
depositary bank as a proximate
consequence. If the Reserve Bank or the
depositary bank prevails in litigation
involving the requirements of this
paragraph, it may recover its court costs
and reasonable attorneys’ fees. A
Reserve Bank shall not be liable for
mistake, neglect, negligence,
misconduct, insolvency or default of any
other bank or other person, including the
paying bank in connection with
providing notice under this paragraph.
(8) Notwithstanding the provisions of
§ 210.6 of this subpart, a Reserve Bank
that undertakes to provide the notice
required in this paragraph on a paying
bank’s behalf shall indemnify the paying
bank for any claim brought against it by
the depositary bank that results from the
Reserve Bank’s failure to exercise
ordinary care or failure to act in good
faith in providing the notice. The paying
bank shall indemnify a Reserve Bank
that undertakes to provide the notice
required in this paragraph on the paying
bank's behalf for any claim brought
against the Reserve Bank by the
depositary bank that results from the
paying bank’s failure to exercise
ordinary care or failure to act in good
faith in connection with the provision of
the notice.
(9) This paragraph does not apply to
an item drawn on the account of the U.S.
Treasury or to an item indorsed by, or
for credit to, the U.S. Treasury,
*

*

*

*

*

By order of the Board of Governors.
February 7,1985.
W illiam W . W iles,

Secretary of the Board.
[FR Doc. 85-3462 Filed 2-11-85: 8:45 am}
BILLING COOF W * -<!'-*»

5741