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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10249
July 18, 1988
]
DELAYED DISBURSEM ENT PR A C TIC ES
Proposed A m endm ent to Regulation CC
Com m ent Invited b y Septem ber 23
To A ll Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:
Following is the text of a statement issued by the Board of Governors of the Federal Reserve
System:
The Federal Reserve Board has issued for public comment a proposed amendment to Regulation
CC (Availability of Funds and Collection of Checks) to restrict certain delayed disbursement practices.
Delayed disbursement is the practice of delaying payment of a check by drawing the check on
a bank located in an area that is remote from the payee in order to increase the time it takes to clear
the check. These practices reduce the efficiency of the check collection system and increase the risks
to depositary banks, which must meet the availability schedules of the Expedited Funds Availability
Act and Regulation CC.
The proposed rule, which would be effective April 1, 1989, would permit a bank to issue an official
check drawn on another bank only if a depositary bank located in the same community as the issuing
bank can receive credit for the check as early as a check drawn on the issuing bank. Comment is also
sought on several additional questions related to delayed disbursement practices.
Comment should be submitted to the Board by September 23, 1988.
Printed below is the text of the Board’s proposal, as published in the Federal Register of June
27. Comments thereon should be submitted by September 23 either to the Board, as indicated in
the notice, or to John F. Sobala, Vice President (212-720-6334).
E. G erald C orrigan,
President.
FEDERAL f^ESemfE SYSTEM
12 OFK
22©
[Regulation CC;
m, R-06381
A vs lta M ty o f Fund andCoflectiort of
Cheeks
4
Board of Governors of the
Federal Reserve System.
a c t i o n : Proposed rule.
AGENCY:
The Board is publishing for
comment a proposed rule amending its
Regulation CC, Availability of Funds
and Collection of Checks (12 CFR Part
229) as part of its regulatory
responsibility for the payments system
under the Expedited Funds Availability
Act. The proposed rule prohibits certain
delayed disbursement practices by
setting out requirements for the issuance
of tellers checks.
p&Yl®: Comments must be submitted on
or before September 23,1988.
ADDRESSES: Comments, which should
refer to Docket No. R-0639, may be
mailed to the Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW„ Washington, DC 20551,
Attention: Mr. William W. Wiles.
Secretary: or may be delivered to Room
B-2223 between 8:45 a.m. and 5:00 p.m.
All comments received at the above
address will be included in the public
file and may be inspected at Room B1122 between 8:45 a.m. and 5:15 p.m.
Elliott C. McEntee, Associate Director
(202/452-3926), Louise L Roseman,
Assistant Director (202/452-3874), Brada
Panther. Analyst (202/452-283*),
Division of Federal Reserve Bank
Operations, or Stephanie Martin.
Attorney, Legal Division (202/452-3198);
for the hearing Impaired only:
Telecommunications Device for the
Deaf, Earnestine Hill or Dorothea
Thompson (202/452-3544).
concerns expressed in the 1979 policy
statement, the Board stated that delayed
disbursement results in higher
SUPPLEMENTARY INFORMATION:
transportation and processing costs and
Background .
an increased possibility of check fraud.
The Board also stated that it intended to
Delayed disbursement is the practice
monitor the success of voluntary efforts
of delaying payment of a check by
to reduce and eliminate the use of
drawing the check on a bank 1 located
in an arSalfiM is remote from the payee. delayed disbursement arrangements
Delayed disbursement practices are
and, if abuses continued, to pursue
designed to increase the time it takes to
appropriate action. In conjunction with
clear a check. These practices reduce - „ this policy statement, the Board
the efficiency of the check collection
implemented the High-Dollar Group Sort
system and increase the risks to
Program to reduce the level of float and
depositary banks, which must meet the
accelerate the collection of checks.
availability schedules of the Expedited
The Expedited Funds Availability Act
Funds Availability Act (“Act”) (12
evidences Congress’ intent to speed the
U.S.C. 4001-4010) and Regulation CC.
availability of funds to bank depositors
Delayed disbursement increases the
and, therefore, suggests that a
time for the collection and return of a
reevaluation of delayed disbursement
check as well as the costs to process
practices is appropriate. Although many
and transport the check, due to the
classes of checks are subject to delayed
increased likelihood that the check must disbursement, the ramifications of
be processed through multiple
delayed disbursement are particularly
intermediary banks. This delay may also significant in the case of teller’s checks.
Regulation CC requires a depositary
result in a check being returned after
bank to make the proceeds of certain
funds must be made available for
checks deposited in transition accounts,
withdrawal under the Act.
The Federal Reserve System has been including cashier’s checks, teller’s
concerned with the problem of delayed
checks,2 and checks drawn on Federal
disbursement for a number of years. The Reserve Banks and Federal Home Loan
Board issued a policy statement on
Banks (collectively "official checks”),
January 11,1979, that discouraged abuse available for withdrawal on the
of the check collection system through
business day following deposit, under
remote disbursement. The policy
specified conditions. If these cheeks are .
statement enumerated the Board’s
drawn on a remote paying bank, the
principal concerns with respect to
depositary bank may not receive credit
remote disbursement, including the risk
for the check by the time funds must be
of loss to depositary banks and
made available to the customer for
recipients of remotely disbursed
withdrawal. Thus, the’ practice of
payments, denial to. consumers and
delayed disbursement permits a
small businesses of access to funds due
depository institution issuing such
them (a problem which has been
checks to impose costs, in terms of lost
addressed, in part, by the Act and
interest, on other depository institutions
Regulation CC), and the possibility of
and to retain for itself interest earned on
unsafe or unsound banking practices
outstanding checks until the checks are
caused by unsecured extensions of
presented for payment.
A recent Federal Reserve Bank survey
credit to customers whose funds at the
remote paying bank are not sufficient to of official checks indicates that
approximately 60 to 80 percent of
cover the customer’s checks. The Board
official checks are deposited in a bank
stated that it believes the banking
that is located in the same state as the
industry has a public responsibility not
issuing bank. Some banks issue official
to design, offer, promote, or otherwise
encourage the use of a service expressly checks that are drawn on a paying bank
intended to delay final settlement and _ remotely located from the issuing bank.
In these cases, the paying bank is often
that exposes payment recipiests to
remotely located from the depositary
greater than ordinary riskp.
On February 23,1984, the Board
bank.
Prior to enactment of the Act, the
issued another policy statement that
Board’s ability to address delayed
further discouraged the use of
disbursement abuses was limited to
arrangements that result in a delay in
discouraging such practices through
the collection and final settlement of
policy statements, and through Federal
checks. In addition to reiterating the
Reserve Bank services, such as the
High-Dollar Group Sort Program, which
accelerates the collection of certain
delayed disbursement checks. The
Expedited Funds Availability Act
authorizes the Board to make
improvements to the check system to
speed the collection and return of
checks, and, thus, to restrict delayed
disbursement practices. Specifically, the
Act gives the Board "the responsibility
to regulate any aspect of the payment
system, including the receipt, payment,
collection, or clearing of checks; and any
related function of the payment system
with respect to checks.” (12 U.S.Ct
4008(c)(1).)
In December 1987, the Board requested public comment on proposed
Regulation CC as well as proposals for
long-term improvements to the check
collection system. A number of
commenters on the proposed Regulation .
CC cited the inequity of requiring the
depositary bank to make the proceeds of
official checks available for withdrawal
on the business day after deposit, if the
bank cannot receive credit for the check
by that time. Some commenters
requested that the Board restrict the
next-day availability requirement to
checks for which the depositary bank
can receive credit within that time.
The Board specifically requested
comment on how to address delayed
disbursement practices and the practice
of issuing official checks payable in a
different check processing region than
the issuing bank. The majority of
commenters addressing this issue
indicated that the practice of issuing
official checks drawn on another
in s t it u t io n l o c a t e d in a d iffe r e n t check
processing region should be eliminated.
One commenter noted that delayed
disbursement of official checks may
have particular effects on deposits to
escrow accounts used in residential real
estate closings. Deposits to these
accounts are comprised predominantly
of official checks that must be accorded
next-day availability, although the
depositary bank does not receive credit
for a portion of these checks until a later
date. The commenter noted that the
later return of these checks poses risks
to the escrow companies. Several other
commenters (all providers of official
check services) opposed any regulatory
action to limit the location of the paying
bank.
Despite the past policy statements of
the Board, certain delayed disbursement
practices continue to be employed.
1 “Bank” is defined in Regulation CC to include
2 Regulation CC defines "teller’s check." as a
Many corporations and banks find
check provided to a customer of a bank or'acquired
all depository institutions. A “paying bank" is the
delayed disbursement attractive,
from a bank for remittance purposes, that is drawn
bank that pays the check and includes payable
by the bank, and drawn on another bank or payable because the timing of the presentment of
through and payable at banks. A "depositary bank'
the checks they issue, and hence
through or at a bank.
is the bank in which the check is first deposited.
2
payment for these checks, is delayed
giving the drawer of the check use of the
funds needed to pay the check for a
longer period of time. Delayed
disbursement is also very profitable to
the banks that provide such services.
These delayed disbursement practices,
however, often disadvantage the
depositary bank that sends the check for
forward collection as well as the
depositor of the check. The costs to the
depositary bank are particularly high in
the case of remotely disbursed checks
that must be given next-day availability
under Regulation CC. Delayed
disbursement may also pose additional
risks to depositary banks.
Certain banks, particularly savings
and loan associations, credit unions,
and small commercial banks, issue
teller’s checks as official checks rather
than issuing cashier's checks (i.e.,
checks a bank draws on itself). Some
teller’s checks are subject to delayed
disbursement, where the paying bank is
remote from the issuing bank in order to
extend the time within which the check
is collected. In some cases these checks
are drawn on a RCPC s routing number,
rather than a Reserve Bank city routing
number, further delaying the collection
of these items.
Many member savings and loan
associations draw checks on their
accounts at Federal Home Loan Banks
that are provided to customers as the
functional equivalent of teller’s and
cashier’s checks. In the case of Federal
Home Loan Bank checks, checks may be
issued by a member of one Federal
Home Loan Bank and drawn on another
Federal Home Loan Bank.
There are a number of reasons, other
than delayed disbursement, that banks
may wish to issue teller’s checks as their
official checks; Due to specialization
and economies of scale, certain banks or
other service providers can perform the
issuing, tracking, reconciliation, and
payment services associated with these
payment instruments at a lower cost
than can the issuing bank itself. These
types of arrangements are beneficial as
long as they do not rely on delayed
disbursement to achieve the cost
benefits.
Request for Comment
The proposed rule, which would be
effective April 1,1980, would amend
3
"RCPC" checks are drawn on depository
institutions located in areas designated within the
territories of Federal Reserve offices but outside
Federal Resreve cities. “City" checks are drawn on
depository institotioBs located in the same city asr
the processing Federal Reserve office. When
deposited for collection, RCPC checks generally
must be deposited several hours earlier than city
checks in order to receive comparable availability,
§ 229.36 of Regulation CC to provide that
a bank that issue® a teller’s check must
draw the check on or designate the
check payable through or at a bank such
that a depositary bank in the same
community as the issuing bank will be
able to receive credit for the check as
early as if the check were drawn on the
issuing bank itself. For the purposes of
Subpart C, a teller’s check includes a
check drawn on a Federal Reserve Bank
or a Federal Home Loan Bank. The
Board i9 also publishing for comment a
Board interpretation of the proposed
rule to be added to the official
Commentary contained in Appendix E
of Regulation CC. In addition, the Board
requests comment on the following
issues;
1. Does the proposed regulation
unnecessarily disrupt current
correspondent relationships? If so. in
what way(s}?
2. Should the Board require that
official checks be conspicuously
identified by labeling them in a certain
way and by prohibiting the label on
other checks? If yes, what specific
requirements should be imposed?
3. Should the Board require that the
name of the paying bank be printed
prominently and in a standardized
location on the check?
4. Should the proposed regulation
further define the community in which
the issuing bank is located?
5. Should the proposed regulation’s
standard for equivalent availability be
tied to specific Reserve Bqnk deposit
deadlines that are applicable to checks
to be presented in the paying bank's
community?
6. Shouldihe proposed regulation’s
standard for equivalent availability be •
expanded to cover checks other than
official checks?
7. Should the Board require official
checks not drawn on the issuing bank to
be payable at multiple presentment
points?
8. Are the liability standards of
Regulation CC, Subpart C, appropriate
for violations of the proposed
requirement?
9. Should the proposed regulation’s
standard for equivalent availability rule
provide an exception for official checks
that do not meet the availability test’ but
,
that are likely to be deposited at
locations distant from the issuing bank?
For example, several commenters asked
that the practice of issuing official
checks drawn on a New York city
correspondent, regardless of the location
of the issuing bank, to remit funds to
foreign payees not be restricted. Under
what circumstances should an exception
apply?
3
10.
If banks in the issuing bank’s
community generally do not collect
checks through the Federal Reserve,
should the availability schedules of one
or more correspondent banks used by
banks in that community be used to
determine whether the proposed
regulation’s standard for equivalent
availability has been met?
Initial Regulatory Flexibility Analysis
Of the items required to be contained
in an initial regulatory flexibility
analysis by 5 U.S.C. 603(b), the first ("a
description of the reasons why action by
the agency is being considered”) and the
second ("a succinct statement of the
objectives of, and legal basis for, the
proposed rule") are found elsewhere in
this preamble.
The requirements of the proposed rule
would apply to all banks subject to the
rule regardless of size. The proposed
rule would affect any bank that issues a
teller's check that does not meet the
equivalent availability standard of the
rule; the Board anticipates that a
number of small banks will be affected
by the rule. The Board considered
exempting very small banks, those that
fall below the threshold for filing reports
of deposit under the Board’s Regulation
D (12 CFR Part 204) (currently those with
deposits of less than $2.9 million) from
the rule’s requirements. If such an
exemption were allowed, however,
small banks would continue to be able
to engage in delayed disbursement of
teller’s checks, and depository banks,
whicl\must make the proceeds of such
checks available for withdrawal
according to the availability schedules
of Regulation CG, would incur
additional costs and risk due to this
practice. The Board believes that the
problems of delayed disbursement can
be addressed only if the proposed rule
applies to all banks.
Because the proposed rule would only
affect an issuing bank’s choice of the
paying bank for its teller’s checks, the
Board does not anticipate that the rule
will impose significant costs on small
banks other than the costs of changing
paying banks and purchasing new check
stock for those banks that do not
currently meet the equivalent
availability standard. The Board does
not anticipate that the proposed rule
would impose extra reporting or
recordkeeping burdens on small banks.
List of Subjects m 12 CFR Part 22S
Banks, Banking, Federal Reserve
System.
For the reasons set out in the
preamble, 12 CFR Part 229 is proposed
to be amended as follows;
are in the same city, town, or similar locality.
Under this proposed rule, a bank in Atlanta*
could issue a teller’s check drawn on a New
1. The authority citation for Part 229
York bank only if an Atlanta depositary bank
continues to read as follows:
would receive credit for that check as
Authority: Title VI of Pub. L 109-86, 101
promptly as it would for a check draw n on
Stat. 552, 635,12 U.S.C. 4001 et seq.
the issuing bank.
To determine whether a depositary bank in
2. The heading of § 229.36 is revised
(he same community as the issuing bank
and a new paragraph (e) is added to
would receive credit for the check as early as
§ 229.36 to read as follows:
it would for a check drawn on the issuing
§ 229.3S Pressfttoerst and issuance, of
bank, an issuing bank may look to the
availability schedule and deposit cfeadlines
checks.
*
*
*
*
*
of the Federal Reserve Bank office that ,
(e)
Issuance of teller’ checks. A bank serves the issuing bank. The applicable
s
deposit deadlines are the deadlines banks in
shall not issue a teller’s check if a
the issuing bank’s community would
depositary bank located in the same
normally use to deposit checks drawn on the
community as the issuing bank would
paying bank. Thus, to determine whether a
not normally receive credit for the check
teller’s check meets the proposed rule's
as early as for a check drawn on the
equivalent availability test, the issuing bank
issuing bank.
must compare: (1) .The availability its local
3. In Appendix E, the heading for
Federal Reserve office provides for checks
§ 229.36 is revised and a new paragraph
drawn on the issuing bank and deposited a t ..
the deposit deadline generally used by banks
(e) is added to Appendix E, § 229.36 to
in the issuing bank’s eoirimunity for collecting
read as follows:
such checks, with (21 the availability that its^
A p pend ix E—Com m entary
local Federal Reserve office provides for
*
H it- *
*
checks drawn on the paying batSt'and
Section 229.38 Presentment and Issuance of
deposited at the deposit deadline generally
Checks
used by banks in the issuing bank’s
*
4 *
h
*
community for collecting such checks. For
example, if a Federal Reserve Bank provides
(e)
Issuance o f teller’s checks. This
credit for checks drawn on a paying bank
paragraph requires that a bank that issu es a
located in another Federal Reserve district
teller’s check m ust draw the check on or
that are deposited by the local Reserve
d esign ate die check payab le through or at a
Bank’s Other Fed deadline at the same time
bank such that a depositary bank in the sam e
as for checks drawn on the issuing bank that
com m unity a s the issu ing bank w ill be ab le to
are deposited at the local Reserve Bank’s
receive credit for the check a s early as if the
RCPC deadline (which is later than the Other
check w ere draw n on the issu ing bank itself.
Fed deadline), the equivalent availability test
For the purposes o f Subpart C, a teller’s
would not be met if banks in the issuing
check inclu des a check draw n on a Federal
bank’s community generally arrange their
R eserve Bank or a Federal H om e Loan Bank.
transportation to the local Reserve Bank such
T w o banks are in the sam e com m nnity if they
PART .12®
—[AiiiMeE©]
4
that the checks arrive for processing after the
Other Fed deadline, but before the later
RCPC deadline. In this example, depositary
banks would receive credit for checks drawn
on the paying bank, located in another
Federal Reserve d istrict on© day later tha®
they would for checks drawn on the issuing
bank.
Most checks cleared outside the Federal
Reserve System are collected at least as
quickly as checks collected through the
Federal Reserve System, and therefore the
Federal Reserve Bank collection times serve,
as reasonable proxies for collection times
generally. Availability under the Federal
Reserve’s High-Dollar Group Sort Program,
however, may not be considered in
determining equivalent availability because,
in many cases, the collection times under this
program are not matched by the private
sector, and therefore such availability does
not serve as an appropriate proxy f e the
normal collection time. Moreover,-th©
depositary bank must sncmr additional ssste- to collect checks under this program, v
An issuing bank that issues-® tetter's chedkfor which equivalent availability
requirements are not met may be liable to the
depositary bank or others as provided in - § 229.38. For example, an issuing bank couM
be liable to a depositary bank:that suffer©'©
loss resulting,from increased float o r due to a
late return of a check if th® lag® would
have occurred had th® check mst th© /• ■ '
,
equivalent availability standard. Thejsduing.
bailk may be liable for additional damages if
it fails to act ip good faith..
Board of-Governors-of the Federal Reserve.
System, June 21,1988:
William W. Wiles,
Secretary o f theBogrd,.
[FR Doc. 88-14359 Filed 8-24-88: M S am}
BR UM ® C S 32 S21CHJ1-C3
@FedFRASER