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F ederal R e se r v e B ank OF DALLAS W IL L IA M H. W ALLACE DALLAS, TEXAS 75222 FIRST V IC E P R E S ID EN T AND C H IE F O PER ATING O FFIC ER September 23, 1988 Circular 88-65 TO: The Chief Operations Officer at all financial institutions in the Eleventh Federal Reserve District SUBJECT Return item handling under Regulation C C DETAILS The Expedited Funds Availability Act legislation and the requirements outlined by the Federal Reserve Board's Regulation CC went into effect on September 1, 1988. A major component of implementing this legislation is the changes resulting in return item processing and the new services developed by the Federal Reserve to assist the financial industry in meeting the provisions of the Act. Since the beginning of September, the Federal Reserve has had an opportunity to review the procedures and practices that institutions are following in presenting return items to Federal Reserve offices. Some suggestions on improving the process are detailed here. While many institutions have done an excellent job in preparing and implementing new return item procedures, there i s s t i l l much concern regarding the overall q u ality o f return item deposits under the new requirements and the unfavorable impact quality problems have on the return item process. Under the requirements of the new return item services, quality is imperative to make the whole system work in an efficient manner. To help institutions identify specific areas where there are concerns, we have developed a summary of the most frequently recurring quality problems. Qualified Return Item Deposits Many institutions are preparing qualified return items for deposit at their local Federal Reserve. By definition, qualification involves identification of the institution of first deposit. Encoding the routing tr a n s it f i e l d with the ABA number of any endorser other than the in s titu tio n of f i r s t deposit does not improve the speed o f returning a dishonored check, nor does i t comply with Regulation CC. Specific problems include: 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 - Items are being encoded with the ABA number of the Federal Reserve Bank rather than the depositary bank. In most ca ses, the Federal Reserve Bank i s not an in s t itu t io n o f f i r s t deposit and should not be considered such when its endorsement is found in the depositary bank field and formatted as a depositary bank endorsement. * Items are being encoded to endorsers other than the depositary bank. This provides no improvement to the speed of handling returns and is prohibited by Regulation CC. * Items are being encoded with nonexistent routing numbers. These errors are delaying the normal return handling, as Fed personnel must verify the existence (or nonexistence) of these routing numbers. * Incorrect routing numbers are being encoded on items with encoding devices that do not have the capability of applying the check digit routine. * Items are being encoded with a fractional routing transit number instead of the nine-digit number. * Institutions are placing the "2" -- which indicates the item as a return item -- in a position other than the position 44 of the MICR line. In addition, they are placing the "2" above or below the remaining MICR information and are failing to encode a "2" in position 44 at al 1. * The customer account number, zip code location, and other information of the first endorsing institution is being used instead of the nine-digit routing transit number of the institution. * There are problems with the quality of strips used on the bottom of checks, as well as the carrier envelopes that are used. The str ip s and carrier envelopes used must be durable and o f high q u a lity. ANSI Standard X9.I3 outlines the quality of paper material in check processing and should be used as a guide for judging the quality of carrier envelopes, etc. If strips and envelopes are not of sufficient quality and durability, they cannot be effectively processed on high-speed sorting equipment. Packaging of Return Deposits In s titu tio n s should ensure that q u a lified and nonqualified returns are separated, not mixed. Should commingling occur, the process for returning the item can be delayed significantly. of review include: Other packaging points * Group all return items of the same deposit type into one or as few return letters are possible. This helps the processing flow upon receipt and allows the depositor to avoid unnecessary return letter fees. * Because items that require large-dollar return notification must be handled specially, they should be deposited separately from returns that do not require notification. - 3 - If the institution of first deposit cannot be identified, the item should be stamped and deposited either as unqualified or forwarded to the previous endorser as identified in the forward collection process. Use the return item cash letter forms that have been provided by your Federal Reserve office. Questions regarding completion of the form and other requirements for packaging should be directed to the individuals listed under "More Information." Endorsements Only the institution of first deposit is allowed to use the endorsement area beginning 3.0 inches from the leading edge and ending 1.5 inches from the trailing edge. Please use the proper endorsement plate on your equipment, depending on the type of work you run. Subsequent endorsements should not be placed in this area. Many institutions of first deposit endorsements are unreadable because the impressions lack sufficient ink. Ensure that your endorsement is readable. Avoid placing a can cellation stamp on the top of the in s titu tio n o f f i r s t d ep o sit's endorsement. Stickers should not be placed on the return item by the paying institution indicating the reason of return. A stamp is the appropriate method to use. Institutions of first deposit are to use either purple or black ink for the endorsement. Some financial in s t itu t io n s ' endorsements are so small they are almost unreadable. Each institution should review its format for readability to reduce missorts as much as possible. These points are not all inclusive, but are only suggestions as to how you can improve key quality points that have been identified at this time. Federal Reserve offices are also striving to implement many quality improvements in their internal operations to improve service to customers. Working together on these initiatives will improve current levels of service and help achieve the mutually beneficial goal of expediting the processing flow of return items. M R INFORM OE ATION For information on return item handling please contact Robert L. Whitman, (214) 698-4357 Robert W. Schultz, (915) 544-4730 at the El Paso (713) 652-1544 at the Houston Branch, or John A. the San Antonio Branch. or Regulation CC provisions, at the Dallas Office, Branch, Luke E. Richards, Bullock, (512) 224-2141 at Sincerely yours
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