Full text of Federal Reserve Bank of New York Circulars : 10239. Expedited Funds Availability

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FEDERAL RESERVE BAMK
OF MEW YORK

[

Circular No. 10239 T
j
May 25, 1988

EXPEDITED FUNDS AVAILABILITY
Overview of New Regulation CC
Effective September 1, 1988

To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:

On May 13,1988, the Board of Governors of the Federal Reserve System announced the adop­
tion of a new regulation (Regulation CC, “Availability of Funds and Collection of Checks”) to imple­
ment the Expedited Funds Availability Act. The new regulation will go into effect on September 1,
1988. The following is adapted from a statement issued by the Board of Governors regarding the new
regulation:
The Federal Reserve Board has issued a new regulation, Regulation CC, to carry out provisions of
the Expedited Funds Availability Act. The regulation spells out when funds deposited in a bank by a
customer in a transaction account must be available to the customer.
Congress adopted the Act last year after expressing growing concern about delayed availability —
the length of time that some banks and other depository institutions place on checks deposited in cus­
tomer accounts before the funds can be withdrawn.
Under the law and regulation, a temporary availability schedule provides for the withdrawal of
funds by the third business day following deposit, if the deposit is a local check. A local check is one
deposited in an institution located in the same Federal Reserve check processing region as the paying
bank. There are currently 48 check processing regions in the country. Proceeds of nonlocal checks must
be made available for withdrawal by the seventh business day following deposit under the temporary
rules. Beginning on September 1, 1990, these schedules will be reduced to two business days for local
checks and five business days for nonlocal checks.
Effective this September, receipt of electronic payments and deposits of cash, as well as deposits of
some types of checks — such as Treasury checks, state and local government checks and cashier’s
checks — generally must be made available for withdrawal the day after deposit.
The regulation contains exceptions to the general rules which, in some instances, permit a bank to
extend the hold on an account beyond the statutory schedule by a reasonable period of time.
Depositary institutions are required to disclose their availability policy to new customers prior to
opening an account, to existing customers, and to any person upon request. Disclosures are also required
on preprinted deposit slips, at branch locations and at automated teller machines.

(OVER)

In addition to the availability rules, the regulation includes rules to speed the collection and return
of checks in order to reduce the risk that banks incur by making funds available to their customers before
learning that a check has been dishonored. In contrast to the high-speed automated processing involved
in the forward collection of checks, the current check return system is a slow, labor-intensive operation.
A bank returning a check must rely on deciphering the indorsements on the back of the check to deter­
mine where the return must be sent. Returns are often transported by mail, rather than courier, further
slowing their trip to the depositary bank. Moreover, checks are generally returned through each of the
banks that collected the check, although this may not be the most efficient path to route the return.
Therefore, it now takes more than three times as long to return a check as it does to collect a check.
Under the new rules, checks will be returned in much the same way they are collected. The new
regulation enables banks to return checks directly to the depositary bank using couriers and banks offer­
ing check return services. The regulation also encourages banks to qualify returned checks for auto­
mated processing by high-speed equipment. The regulation expands the current notice of nonpayment
requirements of Regulation J to all returned checks of $2,500 or more, including those checks that were
not collected through the Federal Reserve, and shortens the time frame within which notices must be
provided.
In order to facilitate direct returns and notice of nonpayment, on April 4, 1988, the Board adopted
indorsement standards which will enable banks to more readily identify the depositary bank to which the
returned check or notice must be sent.

Enclosed — for chief executive officers of depository institutions in this District — is an
overview of the new regulation. The overview, together with the text of the regulation itself and a
description of new retumed-check services that will be introduced to assist institutions in complying
with the new regulation, will be published shortly in the Federal Register. When published, this
material will be sent to all depository institutions in this District. Seminars will be held in June
throughout the District on the regulatory and operational changes that will take place. Information
regarding the dates of these seminars is being sent to you under separate cover.
Additional copies of the overview may be obtained from our Circulars Division (Tel. No.
212-720-5216). Questions on the new regulation related to disclosure requirements, compliance, or
availability schedules should be directed to the Compliance Examinations Department (Tel. No.
212-720-8136); other questions should be directed as follows:
Cranford Office

H ead Office

Matthew J. Puglisi
Manager, Check Processing Department
(Tel. No. 212-720-6551)

Fred A. Denesevich
Regional Manager
(Tel. No. 201-272-9000)
Jericho Office

Buffalo Branch

Anthony N. Sagliano
Regional Manager
(Tel. No. 516-997-4500)

David P. Schwarzmueller
Operations Officer
(Tel. No. 716-849-5018)
Utica Office

Angus J. Kennedy
Regional Manager
(Tel. No. 315-768-2220)
E. G erald C o r r ig a n ,
President.

FEDERAL RESERVE SYSTEM
[Docket NOc R-0620]
Regulation CC
12 CFR Part 229
Availability of Funds and Collection of Checks

AGENCY %

Board of Governors of the Federal Reserve S y s t e m =

ACTION %

Final r u l e 0

SUMMARY;

The Board has adopted a new rule

(Regulation CC) to

implement the Expedited Funds Availability Act„

This rule sets

out the requirements that banks and other depository
institutions make funds deposited into accounts available
according to specified time schedules and disclose funds
availability policies to their c u s t o m e r s .

Regulation CC also

establishes rules designed to speed the return of unpaid c h e c k s .
The Board has also submitted the collection of
information requirements in Regulation CC to the Office of
Management and Budget
Reduction Act

(OMB)

(44 U.SoC.

for its review under the Paperwork

3501 et s e q 0) and OMB regulations on

Controlling Paperwork Burdens on the Public

(5 CFR Part 1320).

The information collection requirements are contained in
Regulation CC and published in this n o t i c e »

Additional

supporting documents may be obtained from the Board clearance
officer listed below,,

Any comments on the collection

requirements should be sent to the OMB desk officer listed
below0

OMB's usual practice is not to take any action on an

[Enc. Cir. 10239]

=2 =

information collection until at least ten working days after
notice in the Federal R e g i s t e r , but occasionally the public
interest requires more rapid a c t i o n .
EFFECTIVE DATES

September 1, 1988, except for 12 CFR 229.12,

which is effective on September 1, 1990.,
1990,

After September 1,

12 CFR 229.11 will no longer be effective.

FOR FURTHER INFORMATION CONTACTS

For information regarding

Subparts A and C contact Joseph R. Alexander,
(202/452=2489),

Senior Attorney,

or Stephanie Martin, Attorney,

(202/452=3198),

Legal Division.
For information on §§ 229.10 through 229.14,

and

§§ 229.19 through 229.21 of Subpart B, contact Louise L.
Roseman, Assistant Director,
Operations

Division of Federal Reserve Bank

(202/452=3874).

For information on §§ 229.15 through 229.18 of
Subpart B, contact Gerald P. Hurst,
(202/452=3667),

Senior Counsel,

Kathleen S. Brueger, Attorney,

or Thomas J. Noto, Attorney,

(202/452=3667),

(202/452=2412),

Division of

Consumer and Community Affairs.
For the hearing impaired o n l v s

Telecommunications

Device for the Deaf, Earnestine Hill or Dorothea Thompson
(202/452=3254).
Federal Reserve Board Clearance Officer,
Division of Research and Statistics

Nancy Steele,

(202/452=3822).

-3-

OMB Desk Officer, Robert Neal, Office of Information
and Regulatory Affairs, Office of Management and Budget, New
Executive Office Building, Room 3 2 2 8 ,

Washington,

D. Co

20503

(202/395=7340).
SUPPLEMENTARY INFORMATION:
OVERVIEW
Delayed availability —

the holds that some b a n k s 1

place on checks deposited into their customers' accounts before
the funds may be withdrawn -= was a subject of growing concern
in the Congress for a number of years.

Many argued that the

holds placed by many banks were unduly long,

and that depositors

have a right to prompter access to their funds.

Banks that

impose holds responded that their availability schedules reflect
the time needed for the collection and return of checks returned
unpaid by the paying bank and provide a measure of protection
against the risk that the bank could not recover funds from the

1
Regulation CC terminology corresponds with the
terminology of the Uniform Commercial Code, with some
modifications.
"Bank8 is defined to include all depository
8
institutions.
A "paying bank" is the bank on which the check is
drawn.
In the case of payable through drafts, the payable
through bank is the paying bank.
A "returning bank" is an
intermediary bank handling a returned check.
A "depositary
bank" is the bank in which the check was first deposited.
(See
§ 229.2 of Regulation CC for the complete definitions of these
terms . )

=4 =

depositor if those funds had already been withdrawn from the
depositor's account„
The Congress concluded that federal legislation was
required to address delayed availability practices and passed
the Expedited Funds Availability Act (the ^Act0) (Title VI of
5
Pubo Lo 100-86, enacted on August 10, 1987)„

The Act seeks to

ensure prompt availability of funds and to expedite the return
of checks,0 the Board is directed to issue regulations to
implement the Act, which becomes effective on September 1, 1988.
The Act includes specific and detailed provisions
requiring banks to: (1) make funds available to their customers
within specified time frames, (2) pay interest on
interest-bearing transaction accounts not later than the day the
bank receives provisional credit, and (3) disclose their funds
availability policies to their customers„

These statutory

provisions provide the Board with little flexibility in
developing rules to implement the Act's requirements.
The Act requires that cash deposits, wire transfers,
and certain check deposits that Congress believes pose little
risk to the depositary bank, such as Treasury checks and
cashier's checks, generally be made available for withdrawal by
the business day after the day of deposit„

The time when the

depositary bank must make other check deposits available for
withdrawal depends on whether the check is ™local0 or 0nonlocal8
0
0
0

=5°

to the depositary bank.

A local check is a check deposited in a

depositary bank that is located in the same Federal Reserve
check processing region as the paying bank.

A nonlocal check is

a check deposited in a different check processing region than
the paying bank.

There are a total of 48 Federal Reserve check

processing offices in the United S t a t e s , and the territory
served by each office constitutes a check processing region.
Under the temporary schedule that becomes effective on
September 1, 1988, a depositary bank must make the proceeds of
local checks available for withdrawal by the third business day
following deposit; that is, the proceeds of local checks
deposited on a Monday must be available for withdrawal by the
following Thursday.

The depositary bank must make the proceeds

of nonlocal checks available for withdrawal by the seventh
business day following deposit; that is, the proceeds of a
Monday deposit must be available for withdrawal by Wednesday of
the following week.
are reduced.

On September 1, 1990, these time periods

At that time, proceeds of local and nonlocal

checks must be available for withdrawal by the second and fifth
business day following deposit,
provided for cash withdrawals,
automated teller machines,

respectively.

Special rules are

deposits at nonproprietary

and deposits made in banks outside

the continental United States.

-6-

Congress provided several exceptions to the
availability schedules.

When a bank invokes one of these

exceptions* it may extend the hold on a customer's account
beyond the statutory schedule by a reasonable period of time* as
determined by Regulation CC.
The statute requires banks to disclose their
availability policies to their customers and inform their
customers that deposited funds may not be available for
immediate withdrawal.

Banks are required to provide disclosures

to new customers prior to opening an account or upon request.
In addition* disclosures are required on preprinted deposit
slips* at staffed locations where consumers make deposits* and
at automated teller machines.

Banks must also provide notice to

their consumer customers whenever their availability policies
change.
The Act gives the Board authority to make improvements
in the check collection and return systems in order to shorten
the time within which depositary banks learn of the nonpayment
of checks* and thereby reduce the number of situations when the
bank will be required by law to make funds available to its
customers before it learns

a check has been dishonored.

The

Board^s authority is broad and general* and extends t© checks
that are not cleared through the Federal Reserve System.
Previously* the Federal Reserve generally had the authority to
regulate only those checks it collected.

-7-

The Board issued for public comment a proposed
regulation and proposed Federal Reserve Bank services to
implement the Act on December 3, 1987.

(52 FR 47,112

(Dec0 11,

1 9 8 7 ) 0) Over 1,000 comments have been received on the
p

proposals.

Many of these comments were very thorough,

and

provided excellent analyses of issues raised in the p r o p o s a l „

A

number of commenters stated that the proposal did a good job
implementing the Act^s requirements,
is essential for industry compliance.

and provided guidance that
The commenters,

however,

expressed concern over the complexity of the Act and regulation,
and the increased costs and risks to the banking industry due to
the disclosure and funds availability requirements.

In

particular, many commenters were concerned with the risks
inherent in the requirement to provide next=day availability for
certain check deposits.
concerns,

This,

as well as a number of other

relate to statutory requirements the Board has little

or no flexibility to modify.

O

•

*

Approximately two-thxrds of the commenters were
commercial banks or bank holding companies.
Ten percent of the
comments were received from savings and loan associations, eight
percent from corporations, five percent from credit unions, and
the remainder from trade associations, clearinghouses, consumer
groups, and others.

=•8 =

The Board and Board staff considered all comments
r e c e i v e d , and discussed aspects of the proposed regulation with
the Consumer Advisory Council and the Return Item Advisory
Group, which is a joint Federal Reserve/banking industry group,
as well as representatives of both industry and consumer
groupsc

Two consulting firms were retained to assess the effect

of certain aspects of the proposal on the banking i n d u stry»
Based on the analysis of the issues raised by the public
comments and this additional input,
changes to the proposed re g u l a t i o n .
proposed regulation,

the Board made a number of
Other provisions of the

including some of those criticized by

commenters, were retained either because they are required by
the Act,

or because they are important to carry out the purposes

of the Acto

Discussion

Regulation CC

(12 CFR Part 229), Availability of Funds

and Collection of Checks,

contains three s u b p a r t s „

Subpart A

defines terms and provides for administrative e n f o r c e m ent„
Generally,
in the Acto

the terms in the regulation are defined as they are
The Board has adopted a number of changes for the

sake of clarity,

to conform the terminology to that which is

familiar to the banking industry,
the Act,

to define terms not defined in

and to carry out the purposes of the Acto

”9=

Subpart
make
the

funds

B specifies

available

availability

schedules within which banks must

for w i t h d r a w a l .

schedules provided

The

regulation reflects

in t h e Act.

of c a s h a n d e l e c t r o n i c payments,

as w e l l

deposits,

for w i t h d r a w a l

business

must be made available
day

following deposit.

for o t h e r checks,
nonlocal.
checks.
limited

The
The

instances

availability,

are

depositary bank

certain checks

are

are provided
local

schedules

and nonlocal

checks,

or

for these
and

in

t h a t m u s t b e g i v e n n e x t “d a y

subject to several

in h i g h e r

on the next

Longer schedules

following charts depict the
for local

deposits

as c e r t a i n c h e c k

b ased on w h e t h e r the checks

schedules

Thus,

exceptions

risk situations.

to protect the

TRempDirary Funds A vailability Schedules

Figure 1

Illustrates availability of different types of checks under the temporary schedules
MONDAY
(Day ©
D

TUESDAY

WEDNESDAY

THURSDAY

FRIDAY

MONDAY

TUESDAY

WEDNESDAY

THURSDAY

(© a y I )

(Dm y^)

(D a y !)

(Day 4)

(D a y ® )

(D a y 0 )

(D a y 7)

(Day@ )

LOCAL
( C le a r ln g to u b

D e p o s it

| .....[ Cash W ithdrawals
|

CheckWratimg
LOCAL
(N o n -C le a rin g
house)

1

$500
NONLOCAL

$ 1 ,0 0 0

The fi rat $100 of a day's deposit must be made available for either cash withdrawal or check
writing purposes at the start of the next business day § 229.10(cXlXvii).
For local checks cleared through a local clearinghouse, the remainder of the deposit must
he made available for either cash withdrawal or check writing purposes by the th ird
business day following the day of deposit | 229.1 l(bXl).
For local checks cleared outside a local clearinghouse, the remainder of the deposit must
be made available for check writing purposes by the third business day following the day
of deposit § 229.1 l(bX2).

For local, checks cleared outside a local clearinghouse. $400 of the deposit must be made
available for cash withdrawal no later than 5:00 p.m. on the day specified in the schedu le.
This amount is in addition to the $100 that must be made available on the business day
following the day of deposit § 2 3 . 1 1(b)(2).
The remainder o f the deposit must be available for cash withdrawal at the start of business
on the following day § 229.11 (bM2).
For nonlocal checks, the remainder of the deposit must be made available for either cash
withdrawal or check writing purposes by the sev en th business day following the duy of
deposit i 229.11(c).

Figure 2

P erm an en t Funds Availability Schedules
008y§trat®$ a v a ila b ility ©i « ® r@ 0 flyp®§ @ ehscks d e p o s its the w ®
it
S

MONDAY
(D a y ® )

TOE®AY
(B a y 1
J)

WEDNESDAY

THURSDAY

FRIDAY

(U ® y 2 )

(B a y S )

CBssy4 )

da^g yg&tor Qte psrm @ i»G schedule®.
MONDAY

(Bay®)

TUESDAY

W EDNESDAY
(D a y ? )
=

LOCAL

'I f f iU lS D A Y
(Day@ )
±

=

=

Deposit

[
j

j/\

[ Cash W ithdrawals
|
Check W riting

^SO^LOCAL

■

1
2
3

T h e fi ran $1 ©fi) o f a d a y ’s d e p o sit m u st be mad® a v a ila b le for e ith e r c a s h w ith d ra w a l © rchecb
w r itin g p u rp o se s a t th e s ta r t o f th e n e s t b u sin e ss d ay § 229.1 (KcHIXviii)Local c h e c k s m u s t b e m a d e a v a ila b le for ch eck w ritin g purpose® b y th e o®©®smS b u sin e ss
day fo llo w in g d e p o s it § 22 9 .1 2 (b ).
N o n lo ca l c h e c k s m u s t b e mad® ava ila b le for ch eck w ritin g p u rp oses b y t h e ffifi&is b u sin e ss
day fo llo w in g d e p o s it § 2 2 9 .1 2(c).

4

§

o f th e d ep osit m u s t b e m a d e a v a ila b le for c a sh w ith d ra w a l no la ter th a n fi:00 p m.
on th e d ay sp ecified in th e ech ed u le.T h is is in a d d ition to th e $ 1 0 0 th a t m u st be m ade
a v a ila b le on th e b u sin e ss d a y fo llo w in g d ep o sit § 2 29.12(d ).
T h e se m a in d sr o f th e d e p o sit m u st b e m ad e a v a ila b le for c a sh w ith d ra w a l at th e sta rt o f
b u sin e ss th e follow in g d a y § 2 2 9 .1 2 (d ).

F©Fmnsimei!i4 Funds A vailability Schedules

Figure 3

Illustrates availability of different typeg of c h e ck s deposited! o n se p ara te days, u n d er th e perm anent sc h eM ® .

1
2
3

The first $100ofa day's deposit must be made available foreithercash withdrawal or check
writing purposes at the start of the next business day § 229.1(XcXIXvii).
Local checks must be made available for check writing purposes by the se c o n d business
day following deposit § 229.12(b).
Nonlocal checks must be made available for check writing purposes by the fifth business
day following deposit § 229.12(c).

4

5

$400 of the deposit must be made available for cash withdrawal no later than 5:00 p.m.
on the day specified in the schedule. This applies to the aggregate amount of deposits that
must be made available on a specified day, and is in addition to the $100 that must be made
available on the business day following deposit § 229.12(d).
The remainder of the deposit must be made available for cash withdrawal at the sta ll of
business the following day § 229.12(d).

-1 0 -

Subpart B also includes rules regarding exceptions to
the s c h e d u l e s , disclosure of funds availability policies,
payment of i n t e r e s t .

and

The Act and regulation require banks to

disclose their specific policy as to when deposited funds will
be available for withdrawal to existing customers,
opening a new account,
addition,

to any person

and to any person upon r e q u e s t .

In

banks are required to disclose their availability

policies in locations where consumer deposits are accepted by
bank employees,

and to provide reminders at ATMs and on

preprinted deposit slips that deposited funds may not be
available for immediate withdrawal*
Subpart C includes rules to speed the collection and
return of checks*

These rules cover the expeditious return

responsibilities of paying and returning banks,
direct returns,

authorization of

notification of nonpayment of large-dollar

returns by the paying bank,

check indorsement standards,

other related changes to the check collection system*

and

The Board

adopted the indorsement standard required by the regulation
(Appendix D to Regulation CC) on April 4, 1988*(53 FR 11, 832
(April 4, 1988)*)

A discussion of the impact of Subpart C on

the check collection system is summarized at the end of this
overview*
Significant Changes in the Final Regulation CC
The following describes the substantive differences
between the proposed regulation and the final Regulation CC*

- I Ll -

Other significant issues and comments received on the regulation
are highlighted later in this document.
1.

Availability Schedules and Exceptions
Treasury Accounts.

At the request of the Treasury,

accounts held by the United States Treasury, such as Treasury
General Accounts and Treasury Tax and Loan Deposit Accounts, are
not subject to the availability and disclosure requirements of
Subpart B of the regulation
Noncash Items.

(§ 229.2(a)0)

The Act and regulation exclude noncash

items from the definition of check.

Thus, noncash items are not

subject to the funds availability requirements of the statute
and regulation.

A number of commenters asked the Board to

clarify that accepting checks on a collection basis is permitted
under the regulation, and that such checks are not subject to
the regulation's availability requirements.
While the regulation does not generally authorize banks
to take checks for collection as an alternative to taking them
for deposit subject to the statutory schedules, it does permit
certain current bank practices of taking checks for collection.
For example, at the request of a customer, a bank may take a
check on a collection basis, handle the check as a noncash item,
and send it directly to the paying bank with special payment
instructions.

This practice enables a bank's customer to know

whether a check is being paid or dishonored.

Taking checks for

collection under these circumstances is not subject to the
availability schedules in the Act.

(§ 229.2(u).
)

“ 12“

Deposits of next-dav checks at unstaffed fa c i l i t ies.
The Act provides next-day availability for cash deposits and
certain check deposits to accounts at a depositary bank "staffed
by individuals employed by such institution.”
require, however,

(The Act does not

that Treasury checks and ”on u s ”3 checks be

deposited at a staffed teller station in order to receive
next-day a v a i l a b i l i t y .}

The proposed regulation required that

these deposits be made available on the next business day,
whether or not they were deposited in person to an employee of
the bank.

The Board requested comment on whether this expansion

of the Act^s requirement would pose any operational p r o b l e m s «
Commenters strongly opposed this expansion of the
next-day availability requirement,

indicating that it would be

very difficult to make funds available on a next-day basis for
deposits made at automated teller machines

(ATMs)

facilities other than staffed teller stations.

and other

They stated that

it is often not possible to collect and verify deposits made at
unstaffed locations in time to make the funds available at the
start of business on the following day.

To address the

operational concerns of the banks, the final regulation
conditions the receipt of next-day availability to deposits
(other than the deposit of Treasury checks and on us checks)
”made in person to an employee of the depositary b a n k , ” in

3

Checks drawn on the depositary bank.

“- 1 3 -

accordance with the Acto

The Board believes that extending the

hold on these deposits to the local and nonlocal schedules is
not warranted by these operational concerns.

Thus, the

regulation provides that deposits that are eligible for next-day
availability that do not meet this condition must be made
available for withdrawal by the start of the second business day
following d e p o s i t .

(§ 229.10(c).)

ATM cut-off h o u r s .
availability requirements,

In addition to the next-day

commenters cited other provisions of

the proposed regulation that would be very difficult to
implement operationally with respect to accepting deposits at,
and permitting withdrawals from, A T M s .

Some of their concerns

focused on what constitutes the start and close of a day for the
purpose of ATM withdrawals and deposits.

The proposed

regulation enabled banks to establish a cut-off hour of 2s00
p.m.

or later for deposits considered received on a given day.

To provide greater flexibility in the servicing of ATMs,

the

final regulation allows a cut-off time as early as 12s00 noon
for the receipt of deposits at ATMs and other off-premise
facilities,

(§ 229.19(a).)

Start of b u s i n e s s .

The regulation generally requires

that funds be made available for withdrawal at the start of
business on the day specified in the schedule.

The proposed

regulation provided that the start of business was generally the
time the branch opens to the public,
not later than li 00 a.m.

and,

in the case of ATMs,

In response to comments that customer

-1 4 -

accounts often cannot be updated with the day's opening balance
by 7 1 00 a.m**
a.m.

the regulation has been modified to require a 9s00

start of business for ATM withdrawals*

(§ 229*19(b)*)

Notice of reasonable cause to doubt collectibility
exception*

The Act and regulation provide an exception to the

availability schedules for instances where a depositary bank has
reasonable cause to doubt whether a particular check will be
collected*

Commenters expressed concern regarding the manner in

which the reason this exception is invoked must be disclosed*
required by the Act*
information*

as

if the reason relates to confidential

such as the pending insolvency of the drawer of the

check or the paying bank*

The Commentary to the regulation has

been expanded to provide guidance on how the bank must disclose*
in the notice it provides its customer*
exception has been invoked*
that in such cases*

the reason this

The revised Commentary provides

the bank may disclose to the customer that

the exception is being applied based on confidential
information.

The bank is required to include in its records a

brief statement of the facts upon which the determination to
invoke this exception was based*

(§ 229*13(e)

Cash Withdrawal Li m i t a t i o n *

and § 22 9 * 13(g)*)

Certain banks limit the

amount of cash a customer may withdraw on any day at ATMs and/or
staffed teller facilities*

The proposed regulation did not

prohibit these limitations as long as the bank's policy is
applied without discrimination to all customers of the bank*

is

not dependent on the length of time the funds have been in the

“ 15 =

account

(as long as the hold has e x p i r e d ) , and is related to

security requirements or bonding limitations of the bank*,
Commenters believed this policy is overly r e s t r i c t i v e *
particularly in the case of policies related to A TM cash
withdrawal limits.

The final regulation does not prohibit cash

withdrawal limitations at ATMs if the bankas policy is not
dependent on the length of time the funds have been the a c c o u n t *
and in the case of limits on over-the-counter cash w i t h d r a w a l s *
is applied without discrimination to all c u s t o m e r s * and is
related to secu r i t y * o p e r a t i n g * or bonding requirements of the
bank.

The regulation does not authorize such policies if they

are otherwise prohibited by st a t u t o r y * r e g u l a t o r y * or common
law.

(§ 22 9 . 1 9 ( c ) .)
Repeated O v e r d r a f t e r .

The proposal contained an

exception to the availability schedules for deposits to accounts
of repeated overdrafters.

Commenters suggested that the

proposed exception would be very difficult operationally to
implement.

The final rule is revised in an effort to simplify

the application of this exception.

The exception now defines a

repeated overdrafter as a customer that overdraws its account*
or bounces checks* on six or more banking days during a
six-month period* or on two or more banking days during a
six-month period in the amount of $5*000 or more.
Time Period for E x c e p t i o n s .

(§ 229.13(d).)

The proposed regulation

allowed a bank to extend the availability schedule by not more
than four business days when it invokes an exception to the

-16-

regulation* s availability schedule.

The final regulation allows

a bank to extend the schedule by a reasonable period of time,
and states that an extension of up to four business days is a
reasonable period.
reasonable,

An extension of more than four days may be

but the bank has the burden of so establishing,

(§ 2 2 9 , 1 3 (h),)
Relation to State L a w , The Act provides that a state
law supersedes federal law if it requires that funds be made
available more promptly than required by federal law.

Other

provisions of state law that are inconsistent with the Act or
regulation are preempted.

This standard is broader than those

of other consumer statutes,

such as the Electronic Fund Transfer

Act and Fair Credit Billing Act, which provide for preemption of
provisions of state law that are inconsistent,

Mand then only to

the extent of the inconsistency,5
5
The proposed regulation included standards that would
be applied to determine whether state law relating to the time
funds must be available for withdrawal are inconsistent with
federal law,

and thus preempted.

The proposal did not, however,

provide standards for determining whether state disclosure
requirements related to funds availability are inconsistent.
The Board provided,

in the regulation,

that disclosures or

notices concerning availability provisions of state law relating
to transaction accounts are preempted by the requirements of
Regulation CC,

(229,20(c),)

■=17 =

2.

Interest Accrual
Use of Fractional A v a i l a b i l i t y .

The Act requires that

a bank begin to accrue interest on interest=bearing accounts not
later than the day it receives provisional credit on the funds
depositedo

To facilitate compliance with this requirement,

the

final regulation permits a bank to begin accruing interest on
check deposits based on the average availability the bank
receives on such deposits on a bank-wide basis.

3o

(229.14(a).)

Disclosures
Case=bv=Case Hold P o l i c y .

The proposed regulation

required as a general rule that banks disclose their specific
policy in a way that would allow customers to determine when a
particular deposit would be available for withdrawal.

The

proposed regulation provided a simplified alternative disclosure
for banks that generally make funds available on the business
day following the day of deposit,
case=by=case basis.

and place holds only on a

This proposed alternative disclosure

required a bank to disclose that it usually provides next=day
availability,

although from time to time it may hold deposits

for a longer specified time,
imposed,

and that if a longer hold was

the customer would be notified.

The proposal required

that the bank furnish the notice that availability of a deposit
was going to be delayed at the time the deposit was made.
bank could provide notice of the delay later,

A

if the bank

informed the customer that a hold might be placed at the time of

-18-

the d e p o s i t , and then notified the customer by the end of that
day if a hold was in fact going to be placed on the d e p o s i t .
Generally,

the commenters favored an alternative

disclosure for banks that had case-by-case hold p o l i c i e s .
Several commenters, however,

asked that the ability to use the

case-by-case disclosure not be limited to banks with a policy of
next-day a v a i l a b i l i t y .

In addition,

commenters objected to the

timing of the notice requirement when a bank imposed a
case-by-case holdo

Specifically,

commenters stated that a

teller may not know whether a check will be held, and thus would
not be able to inform the customer of the possibility of a hold
at the time of the deposit.

In addition,

commenters stated that

the requirement that the bank notify the customer of any hold on
the day of the deposit was too restrictive.
The Board adopted modifications to the proposed
disclosure requirements to address these concerns.

The modified

disclosure rule does not limit the case-by-case alternative to
banks that generally give next-day availability.

Instead,

the

rule allows any bank that generally makes funds available for
withdrawal sooner than is required in the regulation to use this
alternative disclosure.
A bank that extends a hold on a case-by-case basis
must provide notice to its customer within the same time frames
as the notice that is required when an exception to the
availability schedules is invoked.

Thus,

a bank would be

required to provide a notice at the time of deposit if the

“ 19 =

deposit is made at a staffed teller station and the decision to
extend the hold is made at the time of deposit*

Otherwise; the

bank must mail the notice of the hold to the customer not later
than the business day following the day of deposit.

In

addition; the final rule also parallels the requirement
applicable to the reasonable cause exception by prohibiting a
bank that does not provide a notice of a hold at the time of the
deposit from imposing service fees or charges for overdrafts or
returned checks resulting from the hold; if the check subject to
the hold is in fact paid*
ATM Notice.

(§ 229ol6(c)o)

The proposed regulation contained special

notice requirements for ATMs at which customers of banks other
than the bank to which the ATM is proprietary are able to make
depositso

The proposed notice included a requirement to

identify the bank to which the ATM is proprietary„

These

requirements generated concerns as to consumer confusion,
competitive effect; disclosure burden, and effect on state law*
The final regulation eliminates the requirement to identify the
bank to which an ATM is proprietary at the ATM; but a bank that
extends the time period applicable to deposits at nonproprietary
ATMs must explain its policy in its initial disclosure and
either provide a list of proprietary or nonproprietary ATMs with
that disclosure; or identify the bankas name on all proprietary
ATMs o

(§ 229 o18 (c) «)
,

-20“

Branch Location Notic© —
Windowso

Drive-Through Teller

The Act requires that a notice of time periods

applicable to the availability of funds be posted in each
location where employees accept d e p o s i t s „

The proposed

regulation required this notice to be posted in the lobby at
some place where customers would be likely to see it before
making their d e p o s i t s , and required that the notice also be
posted at any drive-through teller w i n d o w s .

Commenters noted

the practical problems the drive-through requirement would
generate and the fact that the Act itself is silent on the
matter.

The requirement that this notice be posted at

drive-through teller windows has been eliminated in the final
regulation

(§229.18 (b) .)

Change in Terms N o t i c e .

The proposed regulation

required that notices of changes in availability policy be sent
to all c u s t o m e r s .

The final regulation limits this requirement

to consumer accounts*
requiremento

consistent with the statutory

In addition* the Commentary provides that banks

are not required to send a change in terms notice if the Board
revises Appendix B* which lists the routing numbers of certain
nonlocal checks that are subject to prompter availability than
the nonlocal schedule.

4 o

(§ 229.18(e).)

Check Return Rules
Standards for expeditious r e t u r n .

The proposed

regulation required paying and returning banks to return checks

-2 1 -

exp editiously, using the forward collection process as the
standard for expeditious r e t u r n .

A number of commenters stated

that this standard was uncertain, particularly in comparison to
the current midnight deadline rule, and expressed concern that
litigation in this area may increase as a result.

These

commenters asked that a more definitive standard for expeditious
return be provided.
The forward collection standard,

rather than a specific

number of days for return, was proposed as the standard for
expeditious return to facilitate compliance for banks,
particularly country banks or banks returning checks to country
banks,

that require a longer period of time to return checks to

a depositary bank.

In order to respond to commenters'

concerns,

the final regulation contains a second test of what constitutes
expeditious return by a paying or returning bank.

Under this

second test, a bank satisfies its return requirements if it
returns a check so that the check would normally be received by
the depositary bank within two days after the check is presented
in the case of a local paying bank or four days after the check
is presented in the case of a nonlocal paying bank with respect
to the depositary bank.
time frames,

If a check is not received within these

the return would still be expeditious if the return

process met the forward collection standard.

The Board believes

that the combination of these rules will speed the return of
checks so that the majority of checks can be collected and
returned within the temporary statutory availability schedules.

“22“

At the same time,

it provides a workable standard that can be

implemented by paying banks and correspondent banks offering
check return services.

(§§ 229.30(a)

Expeditious Return —
proposed regulation,

and 229.31(a).)

Notice P o t i o n .

Under the

a bank could fulfill its responsibilities

to return checks expeditiously by providing a notice of
nonpayment expeditiously, with the check returned in a slower
manner.

Commenters opposed this notice alternative,

that notices are often inaccurate,

stating

and consequently the

depositary bank often cannot charge back the customer's account
with confidence based on a notice.

Commenters did not believe

that this notice alternative was warranted,

and stated that the

paying bank should be required to return the check itself in an
expeditious manner.

The final regulation eliminates notice as

an option for meeting the duty of expeditious return.
(§ 2 2 9 . 3 0 ( a ) .)
Unidentifiable Depositary B a n k .

The proposed

regulation permitted a paying or returning bank to send a
returned check to a bank that handled that check for forward
collection,

even if the collecting bank does not agree to act as

a returning bank.

In response to comments that it was

unreasonable to impose expeditious return requirements on banks
that did not hold themselves out as returning banks,

the final

regulation limits this option for return to cases where the
paying or returning bank is unable to identify the depositary
bank with respect to a returned check.

In these cases,

the bank

=23”

may send the check to a bank that handled the check for forward
c o l l e c t i o n t if the bank advises the collecting bank that it is
unable to identify the depositary bank.

Checks that must be

returned in this manner are not subject to the expeditious
return r e q u i r e m e n t s .

(§§ 229.30(b)

Notice in Lieu of R e t u r n .
for return,

and 229.31(b).)
If a check is unavailable

a paying or returning bank can send in its place a

notice in lieu of r e t u r n .

The depositary bank must treat this

notice as it would a returned c h e c k .

The proposed regulation

permitted electronic notices in lieu of return,

Commenters

stated that allowance for electronic notices in lieu would
entail significant accounting and reconcilement problems.

The

final regulation requires a notice in lieu of return be in the
form of a copy of the returned cheeky
available,

a written notice,

and if no such copy is

(§§ 229.30(f)

and 229.31(f),)

Midnight deadline extension for checks of $1QQ or l e s s .
One of the objectives of the proposed regulation was to reduce
the volume of checks that are returned.

Over one-half of all

returned checks are in amounts of $100 or less.
returns are automatically redeposited,
paid on the second presentment.
returns entirely,

Many of these

and over 60 percent are

To eliminate many of these

the proposed regulation allowed the paying

bank to hold checks of $100 or less for an additional two
business days beyond its midnight deadline in an effort to
secure payment.

“24-

Most of the respondents that commented on this provision
opposed its inclusion in the final regulation,.

Banks asserted

that this practice would create accounting and reconcilement
p r o b l e m s , as well as the customer relations problems arising from
the imposition of returned check c h a r g e s .

Banks also argued that

unlike an automatic redeposit s e r v i c e , where the depositary bank
makes the decision to redeposit the check and incur the risk that
the check may be returned a second time, this provision placed
the decision to hold the checks an additional two days on the
paying bank,

although the risks remain with the depositary bank

or its customer.

Very few commenters indicated that they would

use this optional authority.

Therefore,

the Board has deleted

from the final regulation the provision to hold low-dollar checks
an additional two business days,
Notice of N o n p a y m e n t .

in an effort to obtain payment.
Notice of large-dollar returns is

now required only for those checks collected through the Federal
Reserve.

The proposal expanded this requirement to all checks of

$2,500 or more,
cleared,

regardless of the channel through which they were

and reduced the time within which notice must be

received by the depositary bank.
this requirement,

Commenters generally supported

but recommended several modifications.

A

number of technical changes have been made to the final
regulation.

These include changes that address cases in which

the paying bank cannot determine with reasonable certainty from

=25“

the check all of the required information for the n o t i c e , as well
as locations at which depositary banks must accept notices of
nonpayment.

The final regulation also addresses the depositary

bank's duty to notify its customer that a check is being
returned,

and the paying bank's responsibility for giving notice

of nonpayment and subsequently returning the check.

(§§ 229.33

and 2 2 9 . 3 4 (b).)
I n d o r sements.

The final regulation includes indorsement

standards and rules for depositary b a n k s , subsequent collecting
banks,

and returning banks.

standards on April 4, 1988.

The Board approved these indorsement
One subsequent modification to the

indorsement standard was made to eliminate the requirement that
the depositary bank indorsement avoid the MICR clear band along
the bottom of the check.

(§ 229.35(a),0 Appendix D.)

Inquiry to Paving B a n k .

To address the concerns of the

banking industry regarding the risks inherent in providing
next“day availability for cashier's,
checks,

certified,

and teller's

the proposed regulation included a duty on the paying

bank to respond to inquiries regarding the authenticity of
official checks that it issued.
this requirement,
co m m e n t e r s .

The final regulation eliminates

due to operational difficulties noted by the

-26-

Liability —

Responsibility for Back of the Check.

The

final regulation defines the liability of the paying and
depositary bank for untimely returns due to unreadable
indorsements caused by material on the back of the c h e c k .

The

paying bank is responsible for the condition of the back of the
check when it is i s s u e d .

Thus,

a carbon band, printed contract,

an unreadable indorsement due to
or other material on the back of

the check at the time it is issued is the responsibility of the
paying bank.

The depositary bank is responsible for the

condition of the check after issuance and before acceptance by
the depositary bank,

such as indorsements or other stamps placed

on the check by its customer or a prior indorser.
Liability —
regulation,

Bona Fide E r r o r s .

(§ 229.38(d).)

Under the proposed

a bank would not be liable for a violation of the

return rules of Subpart C if the violation were due to a bona
fide error.

The liability standard in the final regulation

provides that a bank is required to exercise ordinary care and
act in good faith, without the shield of the bona fide errors
provision.

The bona fide errors shield is not necessary,

as the

standards for negligence liability incorporate the purpose of the
bona fide error provision.
Exclusions.
Service money orders,
Treasury,

(§ 229.38(a).)

Under the proposed regulation, U.S.

Postal

checks drawn on the account of the U.S.

and checks indorsed by, or for credit to, the Treasury,

=27“

were excluded from the expeditious return requirements of Subpart
Cc

At the request of the Treasury, the final regulation

eliminates the exclusion for checks indorsed by, or for credit
to, the Treasury.

The final regulation also excludes checks

drawn on a state or local government from the expeditious return
requirement.

(§ 229.42.)

Variation bv Agreement. A number of commenters asked
that banks be explicitly permitted to vary the requirements of
the regulation by agreement, as is permitted under the Uniform
Commercial Codec

There are a number of situations where an

allowance for variation by agreement would be useful.

For

example, a depositary bank may wish to limit its liability to its
depositor, or a paying bank to its customer, for late return due
to material on the back of the check by the depositor or customer
that obscures the depositary bankas indorsement.

The final

regulation permits variation by agreement for the provisions of
Subpart C check return rules.

Persons that are not party to the

agreement, however, are not bound by the variations of the
regulation's requirements.

Banks are not authorized to vary the

requirements of the funds availability and disclosure
requirements of Subpart B by agreement.

(§ 229.37.)

Transition Rule for Merged/Acquired Banks.

Commenters

stated that it would be extremely difficult to comply with
certain requirements of the regulation for a period of time

- 2 8 -

following a merger or acquisition of a bank.

These difficulties

arise from having to treat the banks that have merged as one
entity, before the operations of the banks have been
consolidated.

New provisions have been added to the regulation

to provide a on@“
=year transition period for merged/acquired
banks, during which they may be treated as separate banks for
certain purposes.

(§§ 229.19(g) and 229.40.)

Federal Reserve Bank Services (Docket No. R-0621)
Returned check services.

The Board has adopted new

Federal Reserve Bank returned check services designed to
facilitate bank compliance with the regulatory requirements to
return checks expeditiously, effective September 1, 1988.

These

services were published for public comment in December 1987.
(52 FR 47,171 (Dec. 11, 1987).)

Under the new services, Federal

Reserve Banks will accept and process any returned check, and
return the check directly to the local depositary bank or a
processing center designated by the depositary bank, bypassing
any intermediary collecting banks in the indorsement chain.
Direct return of checks will reduce the time required to return
checks to the depositary bank.

In contrast, today a Federal

Reserve Bank only accepts and processes returned checks that it
collected, and returns each check to the bank that deposited the
check with the Reserve Bank for forward collection.

=29

=

Reserve Banks will also accelerate their processing of
returned checks.

Beginning September 1, 1988, local returns will

be processed on an overnight basis and dispatched with the
forward collection checks the next morning„

Nonlocal returns

will be prepared for high-speed processing (’qualified0) by the
’
“
0
first Federal Reserve office and dispatched to the second Federal
Reserve office the following night=

The Federal Reserve offices

will also accept returned checks that have been qualified by the
paying bank or prior returning bank, and dispatch them as quickly
as forward collection checks„

Today, local returns are processed

during the day, and dispatched one day later0

Moreover, nonlocal

returns are processed manually by two Reserve Bank offices,
adding an extra day to the return process„
With the introduction of new returned check services,
returns will be priced explicitly, with the returned check fees
assessed on the paying or returning bank depositing returns with
the Federal Reserve Bank»

Forward collection fees will be

reduced due to the elimination of the return cost component„
Currently, the Federal Reserve does not explicitly price returned
checks,0 instead, the costs of handling returns are incorporated
in the Reserve Banks' forward collection fees0

Reserve Banks

will also offer a same-day notification service for all
large-dollar returned checks„

Beginning

on January 1, 1989, any

depositary bank that has an on-line electronic connection with

“30-

funds transfer capabilities with the Federal Reserve must receive
large-dollar notices of nonpayment electronically.
The Board has approved additional 1988 expenditures to
implement the new returned check service offerings, not to exceed
$15,000,000 in capital expenditures and $15,000,000 in operating
expenditures.

The costs of providing these services will be

recovered by the Reserve Banks through the fees assessed for the
services.
Truncation and extended MICR capture services ,

As part

of the December 1987 package, the Board proposed to make the
truncation service being piloted by six Reserve Banks a permanent
service that could be offered by all Reserve Banks.

In

truncation, the MICR-line information on the check is captured
and presented to the paying bank electronically, while the paper
checks are retained by the presenting bank.

Although initially

Reserve Banks would provide a truncation service to paying banks
who request this service on a local basis only, eventually the
Federal Reserve System intends to provide a national interbank
truncation service? that is, truncation at the first Federal
Reserve Bank to receive the check.

Private sector service

providers would be able to participate in a nationwide network
under the rules of the National Association for Check Safekeeping
(NAGS)o

One Reserve Bank is now engaged in interbank truncation

on a pilot basis, under the NAGS rules„

=31“

The benefits of truncation include expeditious check
processing and return and a reduction in the number of times the
paper check is handled.

The benefits of truncation will increase

as checks are truncated earlier in the collection process.

The

Board also requested comment on a proposed service that offers
many of the same benefits of truncation without stopping the flow
of the paper check —

the extended MICR capture service.

Under

this service, which has also been provided on a pilot program
basis, Reserve Banks would deliver payment information by
electronic transmission or magnetic tape, provide returned check
and retrieval service, and deliver the checks to the paying bank
several days later using less time-critical transportation.
The Board approved an expansion of the Federal Reserve's
truncation and extended MICR capture pilot programs to permanent
services for all Federal Reserve offices, effective July 15,
1988o (See Docket R-0621 for additional information on truncation
and extended MICR capture services.)
Effect of the Proposal
Cost effect. The requirements of the Act and regulation
will result in several benefits to the public.

Transaction

account customers will be given specific information on when
funds will be made available for withdrawal, which should help
them better manage their accounts.

In addition, many customers

will gain earlier access to their funds.

“ 32=*

A number of commenters indicated, however, that the
overall costs to the banking industry to implement the
availability and disclosure requirements will be quite
significant.

For many banks, these requirements will result in

higher operating expenses and lost investment income due to
earlier withdrawal of collected balances.

There is also a

potential for increases in bad check losses that may result from
the availability requirements.

In particular, the commenters

stated that banks will be exposed to an unacceptable level of
risk from the requirement that certain check deposits, such as
cashier^s checks and certified checks, be made available for
withdrawal at the start of the next business day following
deposit, regardless of the amount.

The next day availability of

these checks, however, is a requirement of the Act.
While the improvements to the check return system
provided in Subpart C of the regulation may increase costs to the
banking industry in the short term as banks adjust to the new
processing environment, these initiatives may result in a
reduction of the overall cost of processing returns in the long
run.

Returns will f e received by the depositary bank more
o

quickly than they are today, reducing the bankas risk from
providing prompt availability of funds to its customers.
Returned checks will be handled by a smaller number of
intermediary banks, due to the direct return provisions in the

“33-

regulation o

The availability and disclosure requirements may

result in a reduction in the number of returns, because funds may
be available for withdrawal sooner, and customers would know more
precisely when they may withdraw funds from their accounts„

Most

importantly, the new indorsement standard should facilitate the
more efficient processing of returns by making the depositary
bank more readily identifiable.

Future enhancements to the

indorsement standard would allow all parties in the check
collection system to automate their return processing completely,
thus further lowering costs.
Competitive Effect.

An important factor considered in

the development of the regulatory framework for expedited returns
and related Reserve Bank services was the effect on competition
in the check collection system.

In this regard, the Board

requested comment on whether there are any returned check
services or other procedural changes for returning banks that the
Federal Reserve did not propose that might assist the returning
bank in providing returned check services.
Commenters* primary concerns with the implementation of
the proposed Federal Reserve services centered around the
potential for the Federal Reserve to become the predominant
provider of returned check services, given the availability
schedules and deadlines that will be provided by the Federal
Reserve Banks.

Several commenters urged that the Federal Reserve

“ 34“

delay offering returned check services or, at a minimum, delay
unbundling returned check costs from forward collection prices
until correspondent banks and other interested parties could
develop their own returned check products and get some experience
with the market pricing mechanism.

There were also comments

suggesting that the Federal Reserve has an unfair competitive
advantage due to its role as regulator and service provider, and
its lower price structure, due, in part, to the fact that the
Federal Reserve does not incur certain costs, such as presentment
fees, that the private sector must pay*
The Board implemented the requirements in Subpart C of
Regulation CC to improve the check return process effective
September 1, 1988, in conjunction with the effective date of the
funds availability and disclosure requirements mandated by the
Acto

Industry representatives indicated that implementation of

these improvements concurrent with the effective date of the
funds availability requirements is important to minimize risks to
the depositary bank from making funds available on a more prompt
basis*
To enable banks to comply with these requirements, the
Federal Reserve Banks will begin offering returned check services
that would meet the requirements in the Act on September 1,
1988c

Handling of returned checks by the Federal Reserve must be

explicitly priced with the introduction of these new services,

“ 35 =
&

since return costs cannot be recovered through the Federal
Reserve Banks' forward collection fees as they are today.

Some

returned checks handled by the Federal Reserve under the new
services will not have been collected through the Federal
Reserve, and thus will not have been subject to the Federal
Reserved forward collection fees.

In addition, paying banks and

returning banks will be able to deposit returned checks with the
Federal Reserve in various ways that result in different costs
being incurred by the Reserve Banks„

To provide correspondent

banks with as much advance notice as possible in order to develop
competing returned check services, the Board published, on
April 4, 1988, estimated price ranges and deadlines for the new
Federal Reserve returned check services.

It is the Board^s

belief that the proposed services meet the standards that the
Federal Reserve has established for priced services,as they will
recover costs; yield clear public benefits by speeding the
handling of returned checks; and because initially, adequate
returned check services are unlikely to be provided by the
private sector.

Educational Efforts
During the public comment period, Federal Reserve Banks
conducted over 220 seminars throughout the country to explain the
requirements of the proposed regulation, and better prepare the

-36-

public to comment on the Board's proposals.

Approximately 17,500

participants attended these seminars, representing over 9,000
depository institutions.

The Federal Reserve Banks plan to

conduct additional seminars in June, to assist the industry in
preparing for the regulatory and operational changes to be
effective on September 1.

In addition, Federal Reserve staff is

working closely with various industry groups with similar
seminars they plan to offer their constituencies.
Effect of the New Return Rules on the Check Collection System
The following is an explanation of the current process
for returning checks and a description of the responsibilities of
paying, returning, and depositary banks now and in the future,
under the check return requirements of Regulation CC.

This

overview should assist the reader in better understanding the
effect of the proposed changes to expedite the return of checks
on paying banks, returning banks, and depositary banks.
In contrast to the forward collection process, the
returned check process is a slow, relatively labor intensive, and
costly operationo

A study prepared for the Bank Administration

Institute concluded that, while the forward collection process
takes an average 1.6 days to complete, the return process takes
an average of 5.2 days.

(
Return Items Study, Final Report,

prepared for the Bank Administration Institute by J.D. Carreker
and Associates, Inc. (May 1985), "BAI Study.5)
®

The BAI study

found that, during the return process, the average returned check

-3 7 “

is handled by 3=4 banks:

the paying bank, an average of 1=4

returning banks, and the depositary bank=

Even though less than

one percent (the study estimated 0=86 percent) of all checks are
returned, the absolute volume of returns (the study estimated 350
million annually) is relatively large.
The BAI Study found that approximately 40 percent of
returned checks take seven days or longer to complete the
collection and return cycle and 15 percent take 10 days or
longer.

Under the temporary schedules, the proceeds of local

checks must be available for withdrawal on or before the third
business day after deposit and the proceeds of nonlocal checks
must be available for withdrawal on or before the seventh
business day after deposit.

Under the permanent schedule,

proceeds of local checks must be available for withdrawal on or
before the second business day after deposit and proceeds of
nonlocal checks must be available for withdrawal on or before the
fifth business day after deposit.

Approximately one-third of the

checks handled by the Federal Reserve Banks would be considered
nonlocal under the Act,
Both correspondent banks and Federal Reserve offices
frequently act as returning banks between the paying and
depositary banks in the return process.

Correspondent banks may

route forward collection checks for payment either through the
Federal Reserve or through private channels.

Thus, the return

=38“

process currently may include one or more correspondents and the
Federal Reserve before the returned check reaches the depositary
foanko

The more intermediate processing steps a returned check

must pass through on its route to the depositary bank, the
greater the probability that additional time will be necessary to
complete the process.
Many checks are collected through local clearing
arrangements, clearinghouses, and direct exchange arrangements.
Such arrangements consist of two or more banks agreeing to
exchange checks drawn on each other.

There are many such

arrangements, and they are a very efficient and fast means of
collecting and returning certain checks.

The returned check

processes of local clearinghouses should be largely unaffected by
the Board's proposals, although the individual participants are
subject to the provisions of the Act.
The Paving Bank
Current.

Today, the paying bank's principal duty when

returning a check is to assure timely dispatch of the check back
to the presenting bank0

The U 0C»C0 and the Federal Reserve's

Regulation J specify that the paying bank must dispatch a check
it has determined not to pay by midnight of the banking day
following the day the paying bank received the check for payment
(the ^midnight deadline”) .

This obligation may be satisfied by

dispatching the returned check by courier or by mail.

The return

= 3 9 “

of checks presented for payment through clearinghouses is usually
subject to the rules of the clearinghouse and these checks are
dispatched accordingly.
Typically* paying banks receive checks for payment
throughout the days

from correspondents* the Federal Reserve* or

through a clearinghouse,

Checks received on a Monday* for

example* would be posted to customers' accounts on Monday night
and any checks that are not to be paid (due to insufficient
funds* account closed* etc.) are rejected from the system and
reports are prepared for management review.

The actual decision

to return a check can be made automatically as a matter of bank
policy or following review by management on Tuesday,

The checks

to be returned are then sent by courier with the bankas forward
collection checks* by mail or courier to other collecting banks*
or by messenger to the clearinghouse.

The return process in this

example must begin by midnight Tuesday to conform to the U.C.C.
Because the return process must begin by midnight* many paying
banks return checks by mail when a courier leaving after midnight
would be faster.

If a check to be returned was presented by the

Federal Reserve and is for $2*500 or more, the paying banks is
also obligated to provide notice of return to the depositary bank
by midnight of the third banking day following receipt (Thursday
in this example),

Receipt of the physical check by the

depositary bank within this time frame would fulfill this
notification requirement.

“* 4 0 “

Many paying banks currently receive checks front more
than one collecting bank and, therefore, dispatch returned checks
to each of those banks.

If the paying bank does not deposit

checks for collection with the bank to which it is returning
checks, these checks are usually returned through the mail.

In

some cases, mail is also used by paying banks to transport
returns to the bank to which it sends its forward collection
checks in order to ensure compliance with the midnight deadline.
The paying bank currently has little incentive to make an effort
to speed the return process and is generally not concerned about
the return process after a returned check has been dispatched
timely.
New return rules.

A major impetus for change In the

role of the paying bank will be the responsibility placed on the
paying bank by § 229.30 of the regulation.

This section states

that the return process must be accomplished in an “expeditious
manner,8 thus providing the Incentive to the paying bank to take
0
steps to speed the flow of returned checks.

Under this new duty,

the paying bank must dispatch returned checks with the same speed
and diligence that it would dispatch forward collection checks
received for deposit by noon on the banking day after the day of
presentment of the returned check.

This means that a check

presented to the paying bank on Monday that is not paid must be
dispatched as quickly as a check deposited in that bank on

-41-

Tuesday morning that is drawn on the depositary banko

A paying

bank also returns a check expeditiously under the new rules if it
returns a local check to the depositary bank within two business
days following presentment, or a nonlocal check within four
business days following presentment.

The Federal Reserve will

provide new deadlines for deposit of returned checks and other
new or enhanced services, to assist paying banks in meeting the
regulation's new duties.
Some of the changes in the return process from the
perspective of the paying bank will bes
1.

In many cases, paying banks will dispatch returns
by the same manner, and at the same time, as they
send forward collection checks.

This will usually

mean that returns will be sent via courier rather
than mail.

The paying bank will be required to

meet the deposit deadlines and sorting requirements
set by any returning bank to which the returned
check is sent.
2.

Additional options will be available to send
returns.

Returns would not be required to follow

the indorsement chain through which the check was
originally collected.

This means that the paying

bank could return all checks to a single returning
bank rather than sending them to multiple

“ 42“

presenting banks.

Paying banks could return checks

to the depositary bank or to a bank agreeing to
process returns, including the Federal Reserve„

If

the paying bank cannot identify the depositary bank
from the indorsement, it may find it necessary to
send that returned check back to the presenting
bank.

The Federal Reserve would accept returned

checks from all paying banks and explicitly charge
for this service.

Other returning banks are likely

to establish similar services.
3o

Paying banks will have the option to prepare a
returned check for automated processing by
high-speed equipment.

This option will be used

only when the paying bank is sending the returned
check to a returning bank.

The bank can produce a

"qualified returned check" (QRC) by enclosing a
returned check in a carrier envelope or attaching a
strip to the bottom of the check, and encoding the
carrier or strip with the nine-digit routing number
of the depositary bank, a special returned check
identifier, and the amount of the check.

By

creating QRCs, the paying bank facilitates
expeditious return of the check to the depositary
bank.

Preparation of QRCs by paying banks also

•=43“

reduces the cost of the overall return process
because returning banks will be able to handle
these checks more efficiently.

To encourage paying

banks to prepare QRCs, the Federal Reserve will
provide later deposit deadlines at lower prices for
QRCs than for returned checks that are not
qualified.

The Board believes that correspondent

banks will adopt a similar strategy,
4.

Paying banks will be required to provide notice of
nonpayment on all returned checks of $2,500 or
more, regardless of the channel of collection, at
an earlier time than required today.

Notices will

have to be received by the depositary bank by 4s00
p.m. (local time) on the second business day
following presentment of a check to the paying
bank.

This means that if a decision is made to

return a check of $2,500 or more that was presented
on Monday, the paying bank must ensure that the
notice is received by the depositary bank no later
than 4 i00 p,m, Wednesday,

The Federal Reserve will

provide timely notice to the depositary bank
provided that the message is originated by Fedwire
by noon on the due date or that the physical
returned check or a telephone message is given to
the Federal Reserve by 9 %00 a.m. on the due date.

“

44

“

Returninq Banks, Including Federal Reserve Banks
Current,

Returning banks currently receive returned

checks from paying banks and from other returning banks„ and
subsequently send those returned checks to depositary banks and
to other returning banks.

Banks that act as collecting banks

during the forward collection process also act as returning banks
during the return process.

Generally, a returning bank receives

a returned check from the bank to which it sent the check for
collection or payment.

The returning bank then sends the

returned check to its prior indorser.

In sending the returns to

its prior indorser, returning banks are under a duty similar to
the duty applicable to paying banks to dispatch returned checks
by the midnight deadline.

One of the advantages to the practice

of returning through the indorsement chain is that parties in the
return process have established account relationships that were
used during the forward collection process.

The payment for the

returned check is typically a reversal of the payment made during
the forward collection process.
The Federal Reserve functions as a returning bank in the
current return process only for checks that it handled in the
forward collection process.

The Federal Reserve receives

returned checks from paying banks and sends them to depositary
banks and other returning banks.

Approximately 43 percent of the

returns currently handled by the Federal Reserve are sent to

45-

correspondent banks acting as returning banks.

In some Federal

Reserve regions, where correspondent banking is particularly
active, the Federal Reserve office currently sends well over 50
percent of the returns it handles to correspondents in their role
as returning banks.
New return rules.

Under the regulation, returning banks

will be held to a standard similar to paying banks.

That is,

returning banks must handle returned checks in an 0expeditious
1
1
manner," i,e,, returned checks must be processed and dispatched
in the same general manner as forward collection checks or
returned to the depositary bank within the two day/four day time
period established for paying banks.

This means that returning

banks must process returned checks in a much shorter time frame
than is typical today.
Federal Reserve Banks will establish new deposit
deadlines for returned checks that closely parallel those for
forward collection checks.

It is expected that other returning

banks will also establish new deposit deadlines for returned
checks.

While these deadlines need not be the same as for checks

received for forward collection, returning banks may wish to
establish these deadlines so as to permit paying or other
returning banks to send returned checks to them on the same
courier as forward collection checks.

Returning banks may return

a check directly to the depositary bank or to another returning
banks as long as the route chosen for the return is expeditious.

“ 4 6-=

Returning banks would have the option* but not be
required, to convert returns to QRCs.

If a returning bank

chooses to prepare a QRC, it may take a day to do so beyond the
time when the check would otherwise have been dispatched.

An

extra day is not available when returning directly to the
depositary bank, because preparation of a QRC would not speed the
return of such checks.
It is anticipated that one of the most significant
changes in the return processing system for non-Federal Reserve
returning banks will be the effect of the Federal Reserved
direct return policy.

Federal Reserve offices will no longer

send returned checks to other non-Federal Reserve returning
banks.

This potential shift in volume (about 43 percent of

current Federal Reserve return volume) could significantly reduce
the number of returned checks that are handled by these returning
banks.
The Depositary Bank
Current.

The depositary bank receives returned checks

from both paying and returning banks.

Generally, a returned

check is received from the bank used by the depositary bank for
forward collection.

Depositary banks also receive notices of

nonpayment on checks of $2,500 or more collected through the
Federal Reserve.

-4 7 -

New return rules.

The depositary bankas requirement to

place a standard indorsement on the check is critical to
improvements in the return process«

By following the new

indorsement standard and imprinting a complete, legible
indorsement on the check, the depositary bank will greatly assist
paying and returning banks in identifying the depositary bank
and, therefore, in processing the return promptly.

To comply

with the standard, most depositary banks will need to replace
their current indorsement plates.

Some banks may want to work

with corporate customers that encode checks prior to deposit to
have the corporate customer place the depositary bankas
indorsement on the check according to the new standard.

Some

small depositary banks may want to arrange with their
correspondent to have the correspondent place its indorsement on
the check as the depositary bank endorsement.

Failure to follow

the indorsement standard may increase the risk of loss to the
depositary bank because paying and returning banks may be
relieved of liability for delay in return if the delay is due to
a nonstandard indorsement.
Depositary banks may receive returns from returning
banks with which the depositary bank currently does not have a
forward check collection relationship.

Many depositary banks

will, for the first time, begin receiving returned checks
directly from the Federal Reserve.

If the depositary bank

-48-

requests courier delivery of its returned checks at a location
where the Federal Reserve does not currently provide courier
service, the depositary bank may be charged for the
transportation.
Some depositary banks that currently are charged by a
returning bank for returned checks will begin receiving returned
checks without a per item charge0

Depositary banks must pay, in

same-day funds, for returned checks on the day the checks are
received.

If paying banks and returning banks that return checks

directly do not wish to receive same-day payment by wire
transfer, cash, or Federal Reserve net settlement, or if the
paying or returning bank does not maintain an account
relationship with the depositary bank, the banks may agree as to
the form of payment.

The form of payment may be a check or an

ACH payment.
Depositary banks that have an electronic connection with
the Federal Reserve with funds transfer capability will have to
receive notices of nonpayment electronically after January 1,
1989.
Under the new check return rules, depositary banks will
receive returned checks and notices of nonpayment earlier than
they do today, and will receive notices of nonpayment on all
large-dollar returned checks, instead of only those checks which
were collected through the Federal Reserve.

“ 49 =

Future regulatory initiatives.

The rules contained in Subpart C

of the regulation will significantly improve the check return
process.

Under the temporary schedule, these rules will

facilitate the return of most checks before the time the
depositary bank must make funds available for withdrawal.

A

significant percentage of checks will not be returned to the
depositary bank before the time funds must be made available,
however, under the permanent availability schedule, which takes
effect in 1990.

The Board will review whether further

modifications to the check return rules should be proposed,
providing for an even more expeditious return of checks, after
assessing the effect of the new requirements on the check return
system.
Changes to the forward collection process are also being
considered.

On April 4, 1988, the Board requested public comment

on whether a paying bank should be required to pay checks
presented before its cut“Off hour, on the day of presentment and
without the imposition of presentment fees.

This proposal has

the potential to speed the collection of some checks.

In

December 1987, the Board requested comment on actions the Board
should take to limit certain delayed disbursement practices.
Board will consider specific proposals to limit the delayed
disbursement of “official5 checks in the near future.
’
5

The