Full text of Federal Reserve Bank of New York Circulars : 10256. Regulation CC

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FEDERAL RESERVE BAIMK
OF hSEW YORK

[

Circular No. 10256 ~j
August 23, 1988

REG U LA TIO N CC
— Interim Rule on Definition of Paying B ank, Effective Septem ber 1
— Com m ent Invited by Septem ber 12

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 approved an interim rule amending Regulation CC (Availability
of Funds and Collection of Checks) to conform the definition of “paying bank” to the Expedited Funds
Availability Act as interpreted by a recent court decision.
Shortly after the Board issued Regulation CC in May 1988, a trade association of credit unions
and one credit union whose checks are payable through a nonlocal bank filed suit against the Board
seeking to overturn the definition of paying bank.
In July 1988, the U.S. District Court for the District of Columbia ruled that the definition of paying
bank in Regulation CC is inconsistent with the Act and invalid to the extent that it defines a credit union
share draft payable through a bank as local or nonlocal depending on the location of the payable through
bank rather than the payor credit union for purposes of the availability requirements in Regulation CC.
The Board has adopted amendments conforming to the court decision on an interim basis to ensure
they are in place when the Act takes effect on September 1, 1988.
The Board also is requesting comment on the interim rule pending consideration of a longer term
response to the court decision.
Comments should be received on this matter by September 12, 1988.

Printed on the following pages is the text of the amendment, as published in the Federal
Register of August 18. Comments on the interim rule, which becomes effective September 1, 1988,
should be submitted by September 12, and may be sent to the Board, as indicated in the notice,
or to John F. Sobala, Vice President, Check Processing Function of this Bank.
E. G e r a l d C o r r i g a n ,

President.

fed er al

system

msFPUiiaiOTAsrtf
On May
13,1988, the Board issued its Regulation
CC—Availability of Funds and
Collection of Checks (12 CFR Part 229)
[B@cte2 03®. Et=@34S]
to implement the Expedited Funds
Availability
Act (the “Act”) (Title VI of
Regulation ©S; Availability ®tf Fyui^o
Pub. L. 100-80). 53 FR 19373 (May 27,
®©d! C©l©®ia@!f? 0ft©©&8
1988). In keeping with the Board’s view
that the Act established a clear link
A©SKKgv; Board of Governors of the
between the time it normally takes a
Federal Reserve System.
check to be cleared and returned, and
A©H@K)s Interim ml® with request for
the time within which the depositary
comments.
bank 1 must make the funds available to
©yE3£3AG^ The Board is amending
the depositor, the regulations provided
Regulation CC to conform the definition that where a check is payable by one
of “paying bank” to the Expedited Funds bank but “payable through” s another
Availability Act as interpreted by a
and sent to the payable through bank for
recent court decision. Other conforming payment or collection, the location of
the payable through bank would
amendments are also being made. The
determine whether a check is local or
Board has adopted these changes on an
interim basis to ensure they are in place nonlocal vis-a-vis the depositary bank
when the Act takes effect on September for the purposes of the funds availability
schedules in the regulation.
1 ,198a The Board is requesting
Shortly after the Board issued
comments on the interim rule pending
Regulation CC, a trade association of
adoption of a final rule.
credit unions and one credit union
DATES: The interim rule takes effect on
whose checks are payable through a
September 1,1988.
nonlocal bank filed suit against the
Comments must be received no later
Board seeking to overturn the definition
than September 1 2 ,198a
of paying bank to the extent that the
ABDfSlSSs Comments, which should refer definition included a payable through
to Docket No. R-0843, may be mailed to bank where the check was drawn on a
credit union. Recently, the court granted
the Board of Governors of the Federal
the plaintiffs’ motion for summary
Reserve System, 20th and C Streets
judgment and invalidated Regulation
NW., Washington, DC 20551, Attention:
CC’s definition of paying bank to the
Mr. William W. Wiles, Secretary; or
extent that it includes a payable through
may be delivered to Room B-2223
bank where the check is drawn on a
between 8:45 a.m. and 5:00 p.m. All
credit union. Credit Union National
comments received will be made
Association v. Board of Governors, No.
available to the public, and may be
88-1295 QG (D.D.C. July 28,1988). The
inspected in Room B-1122 between 8:45
court found that the Board’s regulation
a.m. and 5:15 p.m.
was inconsistent with the Act to the
Comments on the changes to the
extent that it defined the payable
information collection requirements
through bank as the paying bank for
should be sent to Mr. Robert Neal,
purposes of the Act’s funds availability
Office of Information and Regulatory
requirements.
Affairs, Office of Management and
The Expedited Funds Availability Act
Budget, New Executive Office Building,
takes effect on September 1,1988.
Room 3228, Washington, DC 20503.
Regulation CC also takes effect on that
F@ii Fum'MEK in f o r m a t io n ©©efTAen
date, except for those portions of it
Joseph R. Alexander, Senior Attorney,
invalidated by the Court’s order. The
Legal Division (202/452-2489); Louise L. Board has not determined whether to
Roseman, Assistant Director, Division of appeal the court’s decision.
Federal Reserve Bank Operations (202/
1 The Act uses the term “receiving depository
452-3874); Gerald P. Hurst, Senior
institution” to mean “the branch of a depository
Counsel, Division of Consumer and
institution or the proprietary ATM in which a check
Community Affairs (202/452-3007). For
is first deposited.” 12 U.S.C. 4001(20). Because the
term “receiving depository institution” is unique to
the hearing impaired only.
the A ct the Board used the term “depositary bank,"
Telecommunications Device for the
which, because it is used in the Uniform
Deaf, Eamestine Hill or Dorothea
Commerdal Cods (“U.C.C.”) and the Board's
Thompson (202/452-3544).
Regulation J (12 CFR Part 210), is familiar to the
banking industry.
Federal Reserve Board Clearance
B When a check states on its face h a t it io
Officer, Nancy Steele, Division of
“payable through"a bank, that bank is referred to as
Research and Statistics (202/452-3822).
the “payable through bank.” Under the U.C.C., a
payable through bank is not named as the payor,
OMB Desk Officer, Robert Neal,
but is designated as a “collecting bank to make
Office of Information and Regulatory
presentment" U.C.C. 3-120. Under the Board’s
Affairs, Office of Management and
Regulation J, a payable through bank is the “paying
Budget (202/395-7340).
bank” 12 CFR 210.2(j).

3
4

Nevertheless, in order to clarify the
duties of banks and others with respect
to checks in light of the court’s order,
temporary conforming amendments are
being made to the definitions and to the
disclosure rules. These amendments
primarily affect the classification of
checks payable by a depository
institution but payable through another
institution as local or nonlocal They do
not affect payable through drafts
payable by noribaok payors. Further, as
the payable through share draft will
carry tbs raadsg number of the payable
through bank, not the credit union,
provisions in the regulation that allow a
depositary bank to rely on the routing
number t© determine whether a check is
local or nonlocal are also being
amended.
The interim rale permits depository
institutions whose initial disclosures are
affected by the court’s decision to send
simple clarifying notices in regularly
scheduled mailings to existing account
customers. Institutions will be deemed
to be in compliance with the disclosure
requirements of the regulation as long as
the disclosures are revised by December
31,1988. Finally, depository institutions
may have operational difficulties in
identifying credit union payable through
share drafts for availability purposes.
The Commentary to § 229.21(c)
concerning bona fide errors is being
amended to clarify that it may be a bona
fide error if a depository institution fails
to identify for availability purposes a
local check that is a payable through
draft provided that it has procedures for
identifying such drafts. If the Board
decides not to appeal the court’s
decision or if any appeal is
unsuccessful the Board, after
consideration of any comments received
with regard to the interim rule, may
adopt the interim rule as a final
amendment to Regulation CC. In
addition, the Board may also consider
additional rulemaking to address
operational or disclosure problems that
might result because depositary banks
and bank customers cannot rely on the
routing number printed on a payable
through draft to determine whether the
check is local or nonlocal for funds
availability purposes.
The Board believes that it is important
to clarify these issues with an amended
regulation before September 1, so that
banks and other parties affected by
Regulation CC are fully aware of their
responsibilities under the Act by the
time it takes effect Nonetheless, there is
not sufficient time for the Board to
publish proposed regulations for
comment before that date. Accordingly,
the Board, for good cause, finds that the
notice and public comment procedure

normally required is impractical and
contrary to die public interest under 5
U.S.C. 553(b) (B). The Board further finds
that, for the same reasons, there is good
cause under 5 ILS.C. 553(d)(3) to make
the interim rule effective on September
1,1888, without regard for the 30-day
period provided for in 5 U.S.C. 553(d).
Paperwork Reduction A ct Notice. The
Board has previously submitted the
disclosure requirements and model
forms and clauses of Regulation CC to
the Office of Management and Budget
(“OMB”) for clearance under the
Paperwork Reduction Act (44 U.S.C.
3501 e tse q .) and OMB’s Regulations for
Controlling Paperwork Burdens on the
Public (5 CFR Part 1320). (OMB Docket
number 7100-0234.)
The changes to Regulation CC require
modifications to the disclosure
requirements and two additional model
forms; these are described elsewhere in
this notice. These are being submitted to
OMB for clearance. Additional
supporting documents may be obtained
from the OMB clearance officer listed
above.
The Board estimates that the amended
disclosure requirements will result in an
increase in the one-time reporting
burden of Regulation CC requirements
of approximately 107,(KM) hours.
Approximately 11,000 hours of the
increase in reporting burden will be
borne by state member banks and other
institutions under the Board’s
jurisdiction.
Any comments on the collection
requirements should be sent to the OMB
desk officer listed above. OMB’s usual
practice is not to take any action on an
information collection until at least 10
working days after notice in the Federal
Register, but occasionally the public
interest requires more rapid action.
List of Subjects m 12 CFR Part 22©
Banks, Banking, Federal Reserve
System.
For the reasons set out in the
preamble, effective September 1,1988,
Title 12, Chapter n, Part 229 of the Code
of Federal Regulations is amended as
follows:

miHIT 229—AVAILABILITY OF FOMOS
AMO ©OLLJECTIOM OF CHECKS
1. The authority citation for Part 229
continues to read as follows:
Authority: T itle VI o f Pub. L 100-80,101
Stat. 552, 035; 12 U.S.C. 4001 etseq.

2. In § 229.2, paragraphs (r), (s), (z),
and (dd) are revised to read as follows:
§ 22®.2 DoirlnitSem.

(r) “Local check” means a check
payable by or at a local paying bank, or
a check payable by a nonbank payor
and payable through a local paying
bank.
(s) "Local paying bank” means a
paying bank that is located in the same
check processing region as the physical
location of—
(1) The branch or proprietary ATM of
the depositary bank in which that check
was deposited; or
(2) Both the branch of the depositary
bank at which the account is held and
the nonproprietary ATM at which the
check is deposited.

upon the location o f the ban k b y w h ich th ey
are p ayab le and not on the b a s is o f the
location o f the bank w h o se routing num ber
app ears on the check. H ie statem en t
concerning p ayab le through ch eck s m ust
d escrib e h o w the custom er ca n determ ine
w h eth er th ese ch eck s w ill b e treated a s lo ca l
or n on local, or state that sp ecia l rules apply
to such ch eck s and that the custom er m ay
ask abou t the availa b ility o f th ese ch eck s.
T he statem en t m ay be in the form o f an
attach m en t or insert to the bank's existin g
sp ecific p olicy disclosu res. In addition, b an k s
su bject to this disclosu re requirem ent m ust
provide a sim ilar n otice concerning the
p ayab le through check s to existin g accou nt
custom ers no later than D ecem ber 31,1988.
(Even though a bank n eed not m ake a
d isclosu re concerning pay a b le through
ch eck s until D ecem ber 31,1988, the bank
m ust characerize th ese ch eck s correctly as
lo ca l or n on local ch eck s under am en d ed

(z) "Paying bank” means—
(1) The bank by which a check is
payable, unless the check is payable at
another bank and is sent to the other
bank for payment or collection;
(2) The bank at which a check is
payable and to which it is sent for
payment or collection;
(3) The Federal Reserve Bank or
Federal Home Loan Bank by which a
check is payable;
(4) The bank through which a check is
payable and to which it is sent for
payment or collection, if the check is not
payable by a bank;
(5) The state or unit of general local
government by which a check is
payable.
For purposes of Subpart C, and in
connection therewith. Subpart A,
“paying bank” includes the bank
through which a check is payable and to
which the check is sent for payment or
collection, regardless of whether the
check is payable by another bank, and
the bank whose routing number appears
on a check in fractional or magnetic
form and to which the check is sent for
payment or collection.

§ 229.2, and provide availability in
accordance with §§ 229.11, 229.12, and 229.13,
effective September 1, 1988.)

4. In 1 229.30, paragraph (a)(1) is
revised to read as follows:
§ 229.30 Paying bank’s responsibility for

potem

(dd) “Routing number” means—
(1) The number printed on the face of
a check in fractional form on in nine
digit form; or
(2) The number in a bank’s
indorsement in fractional or nine-digit
form.

§ 229.1© [AsvKDfftfed]

3.
Section 229.16(b)(2) is amended by
adding footnote 1 to the end of that
paragraph, to read as follows:
1 No later than December 31,1988, a bank
that distinguishes in its disclosure between
local and nonlocal checks based on the
routing number on the check must disclose
that certain checks, such as some credit
union share drafts that are payable by one
bank but payable through another bank, will
be treated as local or nonlocal checks based

©fcsto,

(a)* * 0
(1)
Two-day/four-day test. A paying
bank returns a check in an expeditious
manner if it sends the returned check in
a manner such that the check would
normally be received by the depositary
bank not later than 4:00 p.m. (local time
of the depositary bank) of—
(i) The second business day following
the banking day on which the check was
presented to the paying bank, if the
paying bank is located in the same
check processing region as the
depositary bank; or
(ii) The fourth business day following
the banking day on which the check was
presented to the paying bank, if the
paying bank is not located in the same
check processing region as the
depositary bank.
If the last business day on which the
paying bank may deliver a returned
check to the depositary bank is not a
banking day for the depositary bank, the
paying bank meets the two-day/fourday test if the returned check is received
by the depositary bank on or before the
depositary bank’s next banking day.

5. In 1 229.31, paragraph (a)(1) is
revised to read as follows:
§220.31

tofe’o rospensItolBty

ter potem
(a) * * *
(1)
Two-day/four-day te st A returning
bank returns a check in an expeditious
manner if if sends the returned check in
a manner such that the check would

normally be received by the depositary
bank not later than 4:09 p.m. (local time)
of—
(i) The second business day following
the banking day on which the check was
presented to the paying bank if the
paying bank is located in the same
check processing region as the
depositary bank; or
(ii) The fourth business day following
the banking day on which the check was
presented to the paying bank if the
paying bank is not located in the same
check processing region as the
depositary bank.
If the last business day on which the
returning bank may deliver a returned
check to the depositary bank is not a
banking day for the depositary bank, the
returning bank meets this requirement if
the returned check is received by the
depositary bank on or before the
depositary bank’s next banking day.

0.
The heading and the first two
introductory paragraphs of Appendix A
to Part 229 are revised and the third
introductory paragraph is removed to
read as follows:

draft is p ayab le by a credit union that is
loca ted in the sam e ch eck p rocessin g region
a s our bank, the share draft w ill b e treated as
a lo ca l check, e v en if the draft is p ayab le
through a bank that is lo ca ted outsid e o f our
ch eck p rocessin g region a s determ ined b y the
routing num ber on the check. If you h a v e any
q u estion s about a sp ecific check, p le a se ask
your branch m anager.

M odel C-19A—Payable through checks
C h ecks that are payab le b y one bank but
are payab le through another bank, su ch as
credit union share drafts that are payab le
through a bank, tire con sid ered lo ca l or
n on local b a sed upon the location o f the bank
by w h ich the ch eck is payab le, n ot the
payab le through bank w h o se routing num ber
app ears on the check. If the bank b y w h ich
the p ayab le through check is p ayab le (the
credit un ion in the c a se o f a payab le through
credit union share draft) is loca ted in the
sam e check processin g region as w e are, the
ch eck w ill b e con sid ered a lo ca l c h e c k ((Our
ch eck p rocessin g region in clu d es 4 4 4.) or
(A m ap o f our ch eck p rocessin g region is
(attached) (availab le upon request).)) If you
w ou ld like to k n ow w h eth er a particular
ch eck falls into this category, yo u m ay ask
your branch m anager for assista n ce.

Appendix A—Routing Number Guide to
Next-Day Availability Checks and Local

Appradlix E-=fAm©ffld©dJ
8.
Appendix E—Commentary to Part
229 is amended as follows:
a.
The commentary on § 229.2 (o), (r),
(8), and (z) is revised to read as follows:

Chssdks

Section 229.2 Definitions

Each bank is assigned a routing number by
Rank McNally & Co., as agent for the
American Bankers Association. The routing
number takes two forms: A fractional form
and a nine-digit form. A paying bank is
generally identified on the face of a check by
its routing number in both the fractional form
(which generally appears in the upper righthand comer of die check) and the nine-digit
form (which is printed in magnetic ink in a
strip along the bottom of the check). Where a
check is payable by one bank but payable
through another bank, the routing number
appearing on the check is that of the payable
through bank, not the payor bank.
The first four digits on the nine-digit
routing number and the denominator of the
fractional routing number form the “Federal
Reserve routing symbol" which identifies the
Federal Reserve District the Federal Reserve
office, and the clearing arrangements used by
the paying bank.

7.
Appendix C to Part 229 is amended
by adding Models C-10 and C-1®A to
the end of the appendix to read as
follows:
Appendix C—Model Forane, Clatss®^
and Notices

M odel C-19— Payable through checks

In some instances we will treat checks as
local or nonlocal based upon the location of
the bank by which the check is payable, not
on the routing numb©? on the bottom of the
check. For example, if a credit union share

(o) Depositary bank. T he regulation u ses
the term d ep ositary bank rather than the term
“receiving dep ository institution.” “R eceivin g
d ep ository institution” is a term unique to the
A c t w h ile “dep ositary b an k” is the term u sed
in A rticle 4 o f the U.C.C. and R egulation J.
A d ep ositary ban k in clu d es the bank in
w h ich d ie ch eck is first d ep osited . If a foreign
office o f a U.S. or foreign bank sen d s ch eck s
to its U.S. correspon dent bank for forw ard
collection , the U .S. correspon dent is the
depositary bank sin ce foreign o ffices of
ban ks are n ot in clu d ed in the d efinition o f
bank.
S a custom er d ep o sits a check in its
accou nt at a bank, the custom er’s ban k is the
depositary ban k w ith resp ect to the c h e c k
For exam p le, if a p erson d ep o sits a check into
an accou n t at a nonproprietary ATM, the
bank hold in g the accou n t into w h ich d ie
ch eck is d ep osited is the dep ositary bank
ev en though another bank m ay service the
nonproprietary ATM and sen d the ch eck for
collection . (Under 1 228.35 the dep ositary
bank m ay agree w ith the bank servicin g the
nonproprietary ATM to h a v e the servicin g
bank p lace its o w n ind orsem ent on the ch eck
as the dep ositary b a n k For the purposes o f
Subpart C, the bank applying its ind orsem ent
as the dep ositary bank indorsem ent on the
check is the dep ositary b a n k )
For p u rp oses o f Subpart B, a bank m ay act
as b oth the dep ositary bank and the paying
bank w ith resp ect to a c h e c k if the check is
p ayab le b y the bank in w h ich it w a s
dep osited , ©r if the ch eck is p ayab le b y a
nonbank payor and p ayab le through or at the
bank in w h ich it w a s d ep osited . A bank is

a lso con sid ered a dep ositary bank w ith
resp ect to ch eck s it receiv es as p a y ee. For
exam ple, a bank is a d ep ositary bank w ith
resp ect to ch eck s it r eceiv es for loan
rep a y m en t e v en though th ese ch eck s are not
d ep o sited in an accou nt at the b a n k B ecau se
th ese ch eck s w ou ld not be “d ep o sited to
a ccou n ts,” they w ou ld not be subject to the
a v a ilab ility or d isclosu re requirem ents o f
Subpart B.

(r) Local check is d efin ed as a check
p ayab le b y or at a lo ca l paying bank, or, in
the c a se o f non ban k payors, pay a b le through
a lo ca l paying b a n k A check p ayab le by a
lo ca l b an k but p ayab le through a n on local
bank is a lo ca l c h e c k C on versely, a check
p ay a b le through a lo ca l bank but pay a b le by
a n on local bank is a n on local c h e c k W here
tw o ban ks are n am ed on a ch eck and neither
is d esign ated as a payab le through b a n k the
ch eck is con sid ered p ayab le b y either bank
and m ay b e con sid ered lo ca l or non local
depend ing on w h ich bank it is sent to for
p a y m e n t G enerally, the depositary bank m ay
rely on the routing num ber to determ ine
wheik"*? a check is lo ca l or non local.
A p p en d ix A in clu d es a list or routing
num bers arranged b y Federal R eserve Bank
O ffice to a ss is t persons in determ ining
w h eth er or not su ch a check is local. If,
h ow ever, a check is payab le b y on e bank b u t'
p ay a b le through another bank, the routing
num ber appearing on the check w ill b e that
o f the p ayab le through bank, not the paying
bank. M any credit un ion share drafts and
certain other ch eck s p ayab le by ban ks are
p ayab le through other banks. In such ca ses,
the routing num ber can n ot be relied on to
determ ine w h eth er the ch eck is lo ca l or
nonlocaL In a fe w c a se s, a p ayab le through
bank w ill b e d esign ated only b y routing
num b era and w ill n ot b e nam ed on the check.
In su ch c a s e s also, the routing num ber m ay
n ot b e relied on to determ ine w h eth er the
ch eck is lo ca l or n on local.
(s) Local paying bank is defined as a
p ayin g b an k lo ca ted in the sam e check
processin g region as the branch or
proprietary A T M o f fe e d epositary b a n k

Examples
1. If a check that is p ayab le b y a bank that
is lo ca ted in the sam e check processing
region a s fe e dep ositary ban k is p ayab le
through a b an k lo ca ted in another check
processin g region, fe e check is con sid ered
lo ca l or n on local depend ing on the location of
the ban k b y w h ich it is p ayab le e v en if the
ch eck is se n t to fe e n on local bank for
collection .
2. The location o f fe e depositary bank is
determ ined by fe e p h ysical location o f the
branch or proprietary ATM at w h ich a check
is d ep osited . If fe e branch o f fee depositary
bank lo ca ted in one check processing region
sen d s a check to fe e depositary b an k’s
central facility in another check processing
region, and fe e cen tral facility is in the sam e
ch eck processin g region as fee paying b a n k
fee ch eck is still con sid ered non local. (See
Com m entary on d efinition o f “paying bank”.)
For d ep osits at nonproprietary ATM s, a
paying bank is a local payin g bank only if the
payin g bank is lo ca ted m the sam e check
processin g region ©@ the location o f b o th the
branch o f th s d ep ositary bank at w h ich fee

accmmt is held and fee nonproprietary ATM
at which fee check fa deposited.
*
*
*
*
*
(z) Paying bank, The regulation uses this
term in lieu of fee Act’s "originating
depository institution." For purposes of
Subpart B, the term “paying bank” includes
the payor bank, the payable at bank to which
a check is sent, or, if the check is payable by
a nonbank payor, the bank through which the
check is payable and to which it is sent for
payment or collection. For purposes of
Subpart C, the term includes the payable
through bank and the bank whose routing
number appears on the check regardless of
whether the check is payable by a different
bank, provided that the check is sent for
payment or collection to the payable through
bank or the bank whose routing number
appears on the check.
Under § § 229.30 and 229.36(a), a bank
designated as a "payable through bank” or
“payable at bank” and to which the check is
sent for payment or collection is responsible
for the expedited return of checks and notice
of nonpayment requirements of Subpart C.
The payable through or payable at bank may
contract with the payor with respect to its
liability in discharging these responsibilities.
The Board believes that the Act makes a
clear connection betw een availability and the
time it takes for checks to be cleared and
returned. Allowing the payable through bank
additional time to forward checks to the
payor and aw ait return or pay instructions
from the payor would delay fee return of
these checks, increasing fee risks to
depositary banks. Subpart C places on
payable through and payable at banks fee
requirements of expeditious return based on
fee time fee payable through or payable at
bank received fee check for forward
collection.

through share draft may be subject to a
reduction in schedules if fee routing number
of fee payable through bank which appears
on the draft is included in Appendix B, even
though the determination feat fee payable
through share draft is nonlocal is based on
fee location of fee credit union and not fee
routing number on fee draft.
*
*
*
*
*

c. The Commentary on | 229.21(c) is
amended by removing the period at the
end of the paragraph and adding the
following language:
Section 229.21 Civil liability

(c) * * *
; or if it fails to identify whether a payable
through check is a local or nonlocal dieck
despite procedures designed to make this
determination accurately.

d. The Commentary on § 229.30 is
amended by revising the introductory
paragraphs of (a) and the complete text
of (a)(1) to read as follows:
Section 229.30 Paying Bank's
Responsibility for Return of Checks

(a) Return o f checks. This section requires
a paying bank (which, for purposes of
Subpart C, may include a payable through
and payable at bank: see § 229.2(z)) feat
determines not to pay a check to return fee
check expeditiously. Generally, a check is
returned expeditiously if fee return process is
as fast as fee forward collection process. This
paragraph provides two standards for
expeditious return, fee “two-day/four-day"
test, and fee “forward collection” te s t
If a check is sent for forward collection
Under fee “two-day/four-day" te s t if a
based on fee routing number, fee bank
check is returned such feat it would normally
associated wife fee routing number is a
be received by fee depositary bank two
paying bank for fee purposes of Subpart C
business days after presentment where both
requirements, including notice of
fee paying and depositary banks are located
nonpayment, even if fee check is not drawn
in fee same check processing region or four
by a customer of feat bank or fee check is
business days after presentment where fee
fraudulent
paying and depositary banks are not located
The phrase “and to which [fee check] is
in fee same check processing region, fee
sent for payment or collection’’ includes
check is considered returned expeditiously.
sending not only fee physical check, but
In certain limited cases, however, these times
information regarding fee check under a
are shorter than the time it would normally
truncation arrangement
take a forward collection check deposited in
Federal Reserve Banks and Federal Home
fee paying bank and payable by fee
Loan Banks are also paying banks under all
depositary bank to be collected. Therefore,
subparts of fee regulation wife respect to
fee Board has included a “forward
checks payable by them, even though such
collection” te s t whereby a check is
banks are not defined as banks for purposes
nonetheless considered to be returned
of Subpart R
expeditiously if fee paying bank uses
b.
The Commentary on § 229.11(c) is transportation methods and banks for return
comparable to those used for forward
amended by adding a paragraph at the
collection checks, even if fee check is not
end immediately preceding (d) to read
received by fee depositary banks within fee
a® follows:
two-day or four-day period.
(1) T w o-day/four-day t e s t Under fee first
Section 229.11 Temporary A variability
te s t a paying bank must return fee check so
Schedule
feat fee check would normally be received by
G
&
Q
it
*
fee depositary bank within specified times,
depending on w hether or not fee paying and
(c) 0 0 *
depositary banks are located in fee same
A reduction in schedules may apply even
in those cases where the determination feat
check processing region.
fee check is nonlocal cannot be made based
Where both banks are located in fee same
on the routing number on the check. For
check processing region, a check is returned
expeditiously if it is returned to fee
example, a nonlocal credit union payable

6
i

depositary bank by 4:00 p.m. (local time o f
fee depositary bank) of fee second business
day after fee banking day on which fee check
w as presented to the paying bank. For
example, a check presented on Monday to a
paying bank must be returned to a depositary
bank located in fee same check processing
region by 4:00 p.m. on W ednesday. For a
paying bank that is located in a different
check processing region than the depositary
bank, the deadline to complete return is 4:00
p.m. (local time of the depositary bank) of the
fourth business day after the banking day on
which the check w as presented to the paying
bank. For example, a check presented to such
a paying bank on Monday must be returned
to the depositary bank by 4:00 p.m. on Friday.
This two-day/four-day test does not
necessarily require actual receipt of the
check by the depositary bank within these
fanes. Rather, the paying bank must send fee
check so feat fee check would normally be
received by fee depositary bank within fee
specified fane. Thus, fee paying bank is not
responsible for unforeseeable delays in fee
return of the check, such as transportation
delays.
Often, returned checks will be delivered to
fee depositary bank together wife forward
collection checks. Where fee last day on
which a check could be delivered to a
depositary bank under this two-day/four-day
test is not a banking day for fee depositary
bank, a returning bank might not schedule
delivery of forward collection checks to fee
depositary bank on feat day. Further, fee
depositary bank may not process checks on
feat day. Consequently, if fee last day of fee
time limit is not a banking day for fee
depositary bank, fee check may be delivered
to fee depositary bank before fee close of fee
depositary bank’s next banking day and fee
return will still be considered expeditious.
Ordinarily, this extension of fane will allow
fee returned checks to be delivered wife fee
next shipment of forward collection checks
destined for fee depositary bank.
The fanes specified in this tw o -d a y /fo u rday test are based on estimated forward
collection fanes, but take into account the
particular difficulties feat may be
encountered in handling returned checks. It is
anticipated feat fee normal process for
forward collection of a check coupled wife
these return requirements will frequently
result in the return of checks before fee
proceeds of local and nonlocal checks, other
than those covered by § 2&$.lG(c), must be
made available for withdrawal under fee
temporary schedules in § 229.11.
Under this two-day/four-day test, no
particular means of returning checks is
required, feus providing flexibility to paying
banka in selecting means of return. The Board
anticipates feat paying banks will often use
re faming banks (see § 220.31) as their agents
to return checks t© depositary banks. A
paying bank may rely on the availability
schedule of the returning bank it uses in
determining whether the returned check
would “normally” be returned within fee
required time under this two-day/four-day
test, unless the paying bank has reason to
believe that these schedules do not reflect the
actual time for return of a check.

e.
T h e Commentary on § 229.31(a) is
amended by revising the paragraphs up
to the examples to read as follows:
Section 229.31 Returning Bank’s
Responsibility for Return o f Checks
(a) Return o f checks. The standards for
return of checks established by this section
sure similar to those for paying banks in
| 229.30(a). This section requires a returning
bank to return a returned check expeditiously
if it agree® to handle the returned check for
expeditious return under this paragraph. In
effect the returning bank is an agent or
subagent of the paying bank and a subagent
of the depositary bank for the purposes of
returning the check. A returning bank agrees
to handle a returned check for expeditious
return to the depositary bank if it'
(1) Publishes or distributes availability
schedules for the return of returned checks
and accepts the returned check for return;
(2) Handles a returned check for return that
it did not handle for forward collection; or
(3) Otherwise agrees to handle a returned
check for expeditious return.
As in the case of a paying bank, a returning
bank's return of a returned check is
expeditious if it meets either of two tests.
Under the “two-day/four-day” test, the check
must be returned ®o that it would normally be
received by the depositary bank by 4:00 p.m,
either two or four business days after the
check w as presented to the paying bank,
depending on whether or not the paying bank
is located in the same check processing
region as the depositary bank. This is the
same test as the two-day/four-day test
applicable to paying banks. (See
Commentary to § 229.30(a).) While a
returning bank will not have first hand
knowledge of the day on which a check was
presented to the paying bank, returning
banks may, by agreement, allocate with
paying banks liability for late return based on
the delays caused by each. In effect, the twoday/four day test protects all paying and
returning banks that return checks from
claims that they failed to return a check
expeditiously, where the check is returned
within the specified time following
presentment to the paying bank, or a later
time as would result from unforeseen delays.
The “forward collection" test is similar to
the forward collection test for paying banks.
Under this test, a returning bank must handle
a returned check in the same manner that a
similarly situated collecting bank would
handle a check of similar size drawn on the
depositary bank for forward collection, A
similar situated bank is a bank (other than a
Federal Reserve Bank) that is of similar asset
size and check handling activity in the same
community. A bank has similar check
handling activity if it handles a similar
volume of checks for forward collection as
the forward collection volume of the
returning bank.
Under the forward collection tests, a
returning bank must accept returned checks,
including both qualified and other returned
checks (“raw returns"), at approximately the
same times and process them according to
the same general schedules as checks
handled for forward collection. Thus, a
returning bank generally must process even
raw returns on an overnight basis, unless its

time limit is extended by one day to convert a
raw return to a qualified returned check.
A returning bank may establish earlier cut
off hours for receipt of returned checks than
for receipt of forward collection checks, but
the cut-off hour for returned checks may not
be earlier than 2KJ0 p.m. The returning bank
also may set different sorting requirements
for returned checks than those applicable to
other checks. Thus, a returning bank may
allow itself more processing time for returns
than for forward collection checks. All
returned checks received by a cut-off hour for
returned checks must be processed and
dispatched by the returning bank by the time
that it would dispatch forward collection
checks received at a corresponding forward
collection cut-off hour that provides for the
same or faster availability for checks
destined for the same depositary banks.

f.
The Commentary on | 229.30 is
amended by revising the complete text
of (a) and (b) to read as follows:
Section 229.38 Presentment o f Checks
(a) P ayable through an d p a y a b le a t checks.
For purposes of Subpart C, the regulation
defines a payable through or payable at bank
(which could be designated the collectible
through or collectible at bank) as a paying
bank. The requirements of § 229.30(a) and the
notice of nonpayment requirements of
§ 229.33, are imposed on a payable through or
payable at bank and are based on the time of
receipt of the forward collection check by the
payable through or payable at bank. This
provision is intended to speed the return of
checks that are payable through or at a bank
to the depositary b a n k
(b) R eceipt a t bank office or processing
center. This paragraph seeks to facilitate
efficient presentment of checks to promote
early return or notice of nonpayment to the
depositary bank, and clarifies the law as to
the effect of presentment by routing number.
This paragraph differs from § 229.39(b)
because presentment of checks differs from
delivery of returned checks.
The paragraph specifies four locations at
which the paying bank must accept
presentment of checks. Where the check is
payable through a bank and the check is sent
to that bank, the payable through bank is the
paying bank for purposes of this subpart,
regardless of whether the paying bank must
present the check to another bank or to a
nonbank payor for paym ent
1. Delivery of checks may be made, and
presentment is considered to occur, at a
location (including a processing center)
requested by the paying bank. This is the
w ay most checks are presented by banks
today. This provision adopts the common law
rule of a number of legal decisions that the
processing center acts as the agent of the
paying bank to accept presentment and to
begin the time for processing of the check.
(See also U.C.C, 4-204(3).) If a bank
designates different locations for the
presentment of forward collection checks
bearing different routing numbers, for
purposes of this paragraph it only requests
presentment of checks bearing a particular
routing number at the location designated for
receipt of forward collection checks bearing
that routing number.
7

2. Delivery may be made at an office of the
bank associated with the routing number on
the check The office associated with the
routing number of a bank is found in a
publication of Rand McNally, K e y to Routing
Numbers, which lists a city and state address
for each routing number. Checks are
generally handled by collecting banks on the
basis of the nine-digit routing number
encoded in magnetic ink (or on the basis of
the fractional form routing number if the
magnetic ink characters are obliterated) on
the check, rather than the printed name or
address. The definition of a paying bank in
§ 229.2(z) includes a bank designated by
routing number, whether or not there is a
name on the check, and whether or not any
name is consistent with the routing number.
W here a check is payable by one bank, but
payable through another, the routing number
is that of the payable through bank, not that
of the payor bank. As the payor bank has
selected the payable through bank as the
point through which presentment is to be
made, it is proper to treat the payable through
bank as the paying bank for purposes of this
section.
There is no requirement in the regulation
that the name and address on the check agree
with the address associated with the routing
number on the check. A bank may generally
control the use of its routing number, just as it
does the use of its name. The address
associated with the routing number may be a
processing center.
In some cases, a paying bank may have
several offices in the city associated with the
routing number. In such case, it would not be
reasonable or efficient to require the
presenting bank to sort the checks by more
specific branch addresses that might be
printed on the checks, and to deliver the
checks to each branch. A collecting bank
would normally deliver all checks to one
location. In cases where checks are delivered
to a branch other than the branch on which
they may be drawn, computer and courier
communication among branches should
permit the paying bank to determine quickly
whether to pay the check.
3. If the check specifies the name of the
paying bank but no address, the bank must
accept delivery at any office. Where delivery
is made by a person other than a bank, or
where the routing number is not readable,
delivery will be made based on the name and
address of the paying bank on the check. If
there is no address, delivery may be made at
any office of the paying bank. This provision
is consistent with U.C.C. 3-504(2), which
states that presentment for payment may be
made at the place specified in the instrument,
or, if there is none, at the place of business of
the party to pay. Thus, there is a trade-off for
a paying bank between specifying a
particular address on a check to limit
locations of delivery, and simply stating the
name of the bank to encourage wider
currency for the check.
4. If the check specifies the name and
address of a branch or head office, or other
location (such as a processing center), the
check may be delivered by delivery to that
office or other location. If the address is too
general to identify a particular office,
delivery may be made at any office

consistent with the address. For example, if
the address is “San Francisco, California,”
each office in San Francisco must accept
presentment. The designation of an address
on the check is generally in the control of the
paying bank.
This paragraph may affect U.C.C. 3504(2)(c) to the extent that the U.C.C. requires
presentment to occur at a place specified in
the instrument.

A pjm sdfx

C— ModbS Forms, Clauses,

and Nofikeo

☆

Models C -l through C -7 generally.” * °
In addition, a bank that distinguishes in its
disclosure between local and nonlocal checks
based on the routing number on the check (as
set forth in model forms C-Q through C-7)
must disclose that certain checks, such as
credit union share drafts that are payable
*
o *
a
through a bank, will be treated as local or
g.
The Commentary on Appendix C to nonlocal based upon the location of the payor
Part 229 is amended as follows:
bank and not on the basis of the rooting
(1) Add a paragraph at the end of the
number on the check. Model C-l® or C-19A
text titled "Models C -l through C-7
could be incorporated into model forms C-4
generally” and before the text beginning through C-7 to meet this requirement.

with “Model C -l”.
(2) Add Commentary on Models C -l9
and C -l9A to the end of the appendix.

M odel C-19 a n d C-19A. Either of these
statem ents satisfies the requirements set

forth in the footnote to § 229.16(b}(2}
concerning payable through checks. The
statem ents are both model clauses and
notices in that they may be added to a bank’s
specific policy disclosure to describe how the
bank treats payable through checks, and may
be used as the notice that must be sent to
existing customers no later than December
31,1988, if the bank’s specific policy
disclosure given to the customers did not
accurately reflect the treatm ent of payable
through checks.
By order of the Board of G w em ors a>SStag
Federal Reserve System, August 12,1SKJ&,
WMMam W . W iias,
S ecreta ry o f the Board

[FR Doc. 88-18702 Filed 8-17-88; &45 am]
billing

coag oate-®i-a

EegMlatlom CC ° Expedited Funds Availability
How the Indorsement Standard
AffeetsDepository Institutions
and TfaeirCustomers
August 1988

TO:

Member Banks o f the Federal Reserve System
and other Depository Institutions

FROM:

Board o f Governors o f the Federal Reserve System

SUBJECT:

Compliance with the Indorsement Standard Contained
in Regulation CC

In May 1988, the Federal Reserve Board issued Regulation CC to implement
the Expedited Funds Availability Act. The regulation contains a standard
that is to be used by depository institutions in indorsing checks starting on
September 1, 1988.
There appears to be a great deal o f confusion about the consequences of not
indorsing checks in accordance with the standard. It has been reported that
institutions have informed established customers that they will not accept for
deposit a check simply because the check was not indorsed properly and
that institutions are instructing their customers to discontinue using checks
containing carbon bands. It has also been reported that some institutions are
requesting customers to sign indemnification agreements, and others are
planning to assess special fees when customers do not follow these instruc
tions.

W e understand that institutions are taking these steps
because the institutions believe that these steps will
reduce the potential risk associated with an unpaid
check being returned untimely. Many o f the above
actions appear to be unnecessary considering the
small additional risk faced by depository institutions
in handling a check that is “improperly” indorsed or
contains a carbon band. The regulation does not
impose any civil penalty for failure to comply with the
indorsement standard. Failure to comply primarily
means that the depository institution is not taking
advantage o f the standard to expedite the return o f
checks. The expeditious return and the indorsement
standard reduce the risks to depository institutions.
The purpose o f the standard, which affects all deposi
tory institutions and their customers, is to make it
easier to identify the depository institution into which
the check was first deposited. By making it easier to
identify the depository institution where the check was
first deposited, checks that are being returned unpaid
(for example, due to insufficient funds) will get back
to that depository institution faster than is possible
today. More expeditious return reduces the likelihood
that the depository institution and/or its customer will
suffer financial losses because a check is returned
unpaid. Depository institutions are required by Regu
lation CC to use new procedures designed to return
checks expeditiously, and the indorsements that make
it easy to identify the depository institution where the
check was first deposited are important to the success
o f these new procedures.

This indorsement standard goes into effect on Septem
ber 1, 1988, in conjunction with the other require
ments o f Regulation CC. (For further information
about the other requirements o f Regulation CC, see
Regulation CC issued in May 1988, and the Special
Notice issued by the Board in June 1988.) Because o f
the relatively short time period between publishing the
indorsement standard in April 1988 and the effective
date o f September 1, 1988, the Federal Reserve
realizes that many depository institutions may not be
able to comply with the standard immediately because
the depository institution may need to modify equip
ment. In some cases, these changes cannot be made
in a cost effective manner by September 1, 1988.
Other efforts to make indorsements easier to read,
such as changing consumer and retail indorsements
are longer-term initiatives.
The attached notice discusses the indorsement stan
dard and its impact on depository institutions and their
customers. It also discusses the consequences o f
failure to adhere to the standard.
If you need further assistance or information, contact
your local Federal Reserve Bank or the Federal
Reserve Board.

Special Notice
3

Regulation CC - Indorsement Standards
Why are checks indorsed and
why does Regulation CC impose
a standard for indorsing checks?
Checks are indorsed in order to transfer rights to
obtain payment for the check. Payees often indorse
checks to the bank1 in which the payee deposits the
check. Banks also indorse each check as the check is
transferred from bank to bank in the course o f pre
senting the check to the paying bank in order to
obtain payment.
Currently, there are no standards with regard to how
such indorsements should be applied to the back o f
the check. As a result, many times the indorsements
are faint, blurred, incomplete and overlapping, mak
ing the indorsement difficult, if not impossible, to
read. This difficultly in reading indorsements is a
major hindrance in returning unpaid checks to the de
positary bank promptly.
The indorsement standard established by Regulation
CC specifies the locations on the back o f the check for
bank indorsements, requires bank indorsements to
contain certain information, and specifies the colors o f
ink for bank indorsements. THE STANDARD DOES
NOT IMPOSE SPECIFIC REQUIREMENTS ON
PAYEE INDORSEMENTS OR ON BANK CUSTOM
ERS ISSUING CHECKS. FURTHER, THERE ARE
NO PENALTIES FOR FAILURE TO MEET THE
INDORSEMENT STANDARDS. NEVERTHELESS,
IT IS IN THE INTERESTS OF BOTH BANKS AND
THEIR CUSTOMERS TO ENSURE THAT CHECKS
ARE CLEARLY AND PROPERLY INDORSED.

'Regulation CCdefines “bank” to include commercial banks,
savings banks, savings and loan institutions, and credit unions; “deposi
tary bank" as the bank where the check is first deposited; and “paying
bank” as the bank on which the check is written.

The Depositary Bank and
Its Customer
The indorsement standard requires the depositary
bank to place its indorsement in a specific location
on the back o f the check, to include certain informa
tion in its indorsement, and to use either black or
purple ink to apply its indorsement. Other banks may
not indorse in the location specified for the depositary
bank indorsement. These requirements should make
it easier for paying or returning banks to identify the
depositary bank and return an unpaid check or
provide notice o f nonpayment directly to the deposi
tary bank.
Making it easier for paying or returning banks to
identify the depositary bank will benefit both the
depositary bank and its customer. New expeditious
return procedures established by Regulation CC are
designed to get returned checks back to the depositary
bank and its customers more quickly than is the case
today. Giving a depositary bank and its customer
greater assurance that it will learn of a returned check
in a shorter time period than it can today will decrease
the likelihood that one o f them will suffer a loss in
connection with a returned check.
Prompt return o f checks is particularly important to
bank customers. Although banks can generally
charge checks back to their customers' accounts, a
bank customer often must contact the check writer to
obtain reimbursement. The sooner that a depositary
bank’s customer can learn o f a returned check, the
sooner the bank’s customer can begin the process o f
searching for the check writer to obtain payment.
Generally, a depositary bank’s customer should have
more success in recovering these funds when begin
ning the recovery process sooner.

Special Notice

Thus, both the depositary bank and its customer will
benefit when the paying or returning bank is able to
identify the depositary bank accurately and easily
from the indorsement placed on the back o f the check.
Therefore, even though the indorsement standard does
not specify a specific location or other requirements
for payee indorsements, both the payee and the
depositary bank may benefit when the payee indorse
ment is applied outside o f the location specified for
the depositary bank.

The depositary bank indorsement is to be made in the
area beginning 3.0 inches from the leading edge o f
the check and ending 1.5 inches from the trailing edge
o f the check. (See Figure 1.) The entire indorsement
need not be within this area; however, the indorse
ment must be placed so that the nine-digit routing
number o f the bank (set o ff by arrows) is wholly
contained within this area. The routing number is the
principle piece o f information that is needed by the

Figure 1. Indorsement Standards Depositary Bank

% O? GO^V *

Special Notice
5

paying or returning bank to identify the depositary
bank. To the extent that the depositary basic does not
want to risk having other indorsement information
overstamped by other bank indorsements, that infor
mation should also be placed in the location reserved
for the depositary bank indorsement. However, the
only piece o f information that is required to be in this
area is the depositary bank’s nine-digit routing number
(set o ff by arrows).
If a depositary bank and its customer adhere to the
indorsment standard, they will not be responsible if a
paying or returning bank fails to return a check timely
due to an error in reading the depositary bank's
indorsement. This does not affect a depositary bank’s
right to claim untimely return for violations o f the
paying bank's “midnight deadline” rule from the Uni
form Commercial Code.
Some depositary banks have informed their customers
that they will not accept some checks for deposit
simply because they do not indorse wholly within the
payee indorsement area. However, payee indorse
ments may be placed anywhere on the back o f the
check outside o f the location specified for the deposi
tary bank.
Referencing Figure 1, this means that the payee
should indorse either in the area from the leading edge
o f the check to 3.0 inches from the leading edge or in
the area from 1.5 inches from the trailing edge o f the
check to the trailing edge o f the check. Today, most
payees conventionally indorse in the 1.5 inches
closest to the trailing edge o f the check. It is antici
pated that most payees will continue to indorse in this
area, however, they are not required to do so. In
dorsing in the payee area merely reduces the risk that
the payee's indorsement may be obscured by other
indorsements.

Depositary banks are encouraged to inform their
customers that the 1.5-inch area closest to the trailing
edge o f the check will not generally be used by
depositary banks and will not be used by subsequent
collecting banks when applying indorsements. This
means that payees receiving returned checks and
relying on information contained in their indorsement
about the identity o f the check writer will most likely
find it easier to read such information if the indorse
ment is placed in this area. The Federal Reserve
understands, however, that many retail indorsements
and other information necessary to help identify check
writers may not fit into this location. Therefore, it is
still acceptable for the payee indorsement to be placed
in the 3-inch area closest to the leading edge o f the
check; however, payee indorsements in this area may
be overstamped by a bank indorsement applied during
the process o f collecting the check (see discussion o f
subsequent bank indorsements below); however, this
occurs today and should not present any significant
problems to the payee o f the check.
Some depositary banks have retail customers who
deposit large numbers o f checks that have already
been prepared for automated processing. The retail
customer o f the bank may apply the depositary bank
indorsement in addition to its own indorsement. This
is perfectly acceptable under the regulation, but is not
required. This could be done by the retail customer
by either applying a separate indorsement on behalf o f
the depositary bank or by incorporating the require
ments o f the depositary bank indorsement into a joint
payee/depositary bank indorsement. When the retail
customer applies the depositary bank indorsement, the
retail customer can control placement o f the deposi
tary bank indorsement, thereby insuring that any
payee indorsement information that might infringe
into the location reserved for the depositary bank does
not render the depositary bank indorsement unread
able.

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Special Notice
6

In other cases, a smaller depositary bank may desire
to have its correspondent indorse as the depositary
bank so that its correspondent will receive all returned
checks and notices o f nonpayment on behalf o f the
depositary bank. Regulation CC allows banks to
make such arrangements, by agreement. In these
cases, the correspondent will serve as the depositary
bank for purposes o f Subpart C o f Regulation CC.
When the correspondent will be indorsing as the
depositary bank, the respondent bank (the actual
depositary bank) should not indorse as a depositary
bank. The regulation does not require the respondent
bank to indorse the check in any particular manner in
these cases. The respondent bank should indorse the
check and is not prohibited from doing so either as a
payee o f the check or in the subsequent bank indorse
ment location.

The Paying Bank and
Its Customer
The paying bank is not required to indorse the check
by Regulation CC, however, it is not prohibited from
doing so. If the paying bank indorses the check, it
would benefit most by staying clear o f the location
specified for the depositary bank because, if it decides
to return a check, the paying bank and returning
banks would be tetter able to identify the depositary
bank.
The paying bank’s customer, while not an indorser o f
the check, may still be affected by the indorsement
standard. Many checks are issued with markings on
the reverse side o f the check. These markings are
applied for a variety o f reasons and include preprinted
information, cross-hatching applied for security to
prohibit reading the check information from the
reverse side or through a mailer, and carbon bands
that are used to transfer information to a ledger when
the check is written.

These checks are a legal, negotiable, and acceptable
form o f payment. The Board also recognizes, how
ever, that depositary banks may be unable to apply in
dorsements that would avoid such markings. Never
theless, it is to the benefit o f the depositary bank to
avoid these markings whenever possible so that the
depositary bank can be assured o f receiving returns as
quickly as possible. In some cases, when markings
are applied to the backs o f checks in a standard
fashion, such as carbon bands, banks should be able
to anticipate where there markings will occur and
would benefit by designing indorsements such that the
nine-digit routing number in the indorsement avoids
such standard markings.

Responsibility for the Back
of the Check
In order to assure depositary banks that their rights
would not be affected by accepting for deposit checks
that have markings on the back or bank customer
indorsements that affect the depositary bank indorse
ment area, Regulation CC provides that the depositary
bank is responsible for markings on the back o f a
check after the issuance o f a check and the paying
bank is responsible for the back o f a check when it is
issued. In certain instances, this responsibility may
affect who tears the loss for a check that is returned
untimely due to inability to read the depositary bank
indorsement. For example, if:
1.

The paying bank’s customer issues acheck with
markings on the back and the check bounces;

The paying or a returning bank is unable to
identify the depositary bank because the markings
on the check interfere with the depositary bank
indorsement;

The returned check gets back to the depositary
bank later than it otherwise would have because
the paying or returning bank cannot identify the
depositary bank;

The depositary bank cannot charge back the
return to its depositing customer’s account and,
therefore, experiences a loss;

The loss would not have occurred had the return
been timely;

The loss is o f an amount sufficient for the deposi
tary bank to file an untimely return claim; and

The paying bank is unable to pay the check or
recover the funds from the customer that issued
the check.

The paying bank would suffer a loss on the check.
The likelihood that the paying bank would actually
experience a loss for most customer accounts for
customers that issue checks with markings on the
back is relatively low because o f the sequence o f
events that must occur before the paying bank is
exposed.

Subsequent Bank Indorsements
Subsequent collecting bank indorsements must avoid
the location specified for the depositary bank indorse
ment, must provide only certain information in the in
dorsement, and must not use purple ink. These
indorsements must include ONLY the nine-digit
routing number (without arrows), the indorsement
date, and an optional trace/sequence number.
The abbreviated information content o f the subsequent
bank indorsement is another indicator that that in
dorsement is not that o f the depositary bank. In
addition, the reduction in information contained in
subsequent bank indorsements will assist in the
readability of multiple indorsements (possibly includ
ing the payee indorsement, see discussion above)
applied in that location.

Returning Bank Indorsements
The indorsement standard for returning banks is less
strict than that for depositary and subsequent banks.
There are no information content or color require
ments for returning bank indorsements. Specifically,
returning banks are required to stay clear of the area
from 3.0 inches from the leading edge o f the check to
the trailing edge o f the check. This requirement will
protect the location specified for the depositary bank
location as well as the area commonly used, but not
required, for payee indorsements.

Full text of Federal Reserve Bank of New York Circulars : 10256. Regulation CC

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