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F E D ER A L R ES ER V E BANK O F NEW YO R K r Circular No. 7 3 5 4 "I L March 6, 1974 J PROPOSED REVISION OF REGULATION J — Extension of Period for Public Comment to April 8 — Questions and Answers to Clarify Proposal T o A ll Banlcs, and Others Concerned, in the Second Federal R eserve D istrict: Following is the text of a statement issued today by the Board of Governors of the Federal Reserve System: T he B oa rd o f G overn ors o f the F e d era l R eserve System tod a y exten ded u n til A p r il 8 the p e rio d fo r p u b lic com m ent on the basic stru ctu re o f the N a tio n ’s paym ents m echanism an d its p ro p o se d re g u la tory changes relatin g to electron ic fu n d s tran sfer. The deadline fo r com m ent had o rig in a lly been set fo r M arch 8. The B o a r d ’s p u b lic notice, an nounced on N ovem ber 19, 1973, in vited com m ent on p rop osed changes in R egu lation J (ch eck co lle ctio n ) and on the basic questions con cern in g ow nership, op era tion a n d allocation o f the costs o f an electron ic paym en ts m echanism . Several requests fo r an extension o f the com m ent p eriod have been received b y the B oard. A t the same time, the B oa rd issued the attached series o f questions and answers design ed to c la r ify the intent o f the N ovem ber proposals and to dispel m isun derstan din gs that have arisen about them. These questions and answers are n ot in ten ded to be exhaustive or tech n ical responses to sp ecific inquiries. The text of the Board of Governors’ proposal to expand Regulation J is contained in our Circular No. 7274, which was sent to you on November 20, 1973. Comments thereon should be sub mitted by April 8, 1974, and may be sent to our Payment Systems Department. Printed below is the text of the series of questions and answers referred to in the above statement. Additional copies of this circular will be furnished upon request. A lfred H a y e s , President. Questions and Answers Relating to the Board’s Proposal of November 19, 1973 To Amend Regulation J Covering Clearance of Checks and Electronic Transfer of Funds T he B o a r d ’s p rop osa l o f N ovem ber 19, 1973, w ould ex p an d R egu la tion J w hich cu rren tly governs the use o f F ed eral Reserve fa cilities to collect checks. The existin g R egu lation J w ou ld becom e Subpart A o f the exp an ded regulation. Subpart B w ou ld set fo rth the rules and proced u res n ow con tain ed in the operating circu lars o f the F ed era l R eserve B anks that govern the use o f the F ed era l R eserve C om m unications N et w ork fo r credit transfers. Subpart C w ou ld p rovid e a legal fram ew ork fo r use o f F ed era l Reserve fa c ili ties to collect fu n d s electronically. Q U E S T IO N S R E L A T I N G T O S U B P A R T B — C R E D IT T R A N S F E R S 1. W hat type o f credit transfers are envisioned under Subpart B ? S u bpart B makes no change in the present treat ment o f the large-dollar-value cred it tran sfers n ow sent on the F ed era l R eserve C om m unications N et work. H ow ever, S u bpart B w ou ld con tain the fra m e w ork fo r h an d lin g large num bers o f wage, salary, re tirem ent or other incom e paym ents. F o r exam ple, this p a rt o f the B o a r d ’s p rop osa l w ou ld perm it a business to p a y its em ployees b y cred itin g wages to th eir bank accounts. This w ou ld be done in the f o l lo w in g m a n n e r : th rou gh the F e d era l R eserve C om m unications N et w ork in m uch the same w a y that incom e p aym en t n etic tape con tain in g p a y ro ll in form a tion fo r the em cred it tra n sfers w ou ld be made. The p rop osed ex p a n ded regu la tion w ou ld p erm it the efficient process in g o f large num bers o f small paym en ts w hich occu r on a regu la r basis, such as the p aym en t o f u tility bills, p loyees to be p aid b y the business. m ortgage paym ents and paym ents on installm ent debt. — A business w ou ld p rov id e its bank w ith a m ag — T he bank servin g the business w ou ld use this in form a tion to cred it e m p loyees’ accounts m aintained in the same bank. — C redits con tain ed on the m agn etic tap e fo r ac counts in other in stitu tions w ou ld be sent to a F ed era l R eserve office. T his office w ou ld disperse the p a y ro ll in form a tion to oth er in stitu tions used b y the com p a n y ’s em ployees. The F e d e ra l R eserve C om m u n ica tions N etw ork w o u ld be used to send this in fo rm a tio n to oth er F ed era l R eserve offices w h ich service in stitu tions used b y the c o m p a n y ’s em ployees. The F e d e ra l R eserve office receiv in g this in fo rm a tio n w ou ld send it to the in d iv id u a l financial in stitu tions in the fo r m o f m agn etic tape, p u n ch ed cards, or h a rd co p y . the p ra ctice used in T his is U nder the regu lation, it w ou ld be possible fo r a m em ber bank, at the d irection o f a custom er, to send debit items d ire ctly to a F ed era l R eserve office fo r collec tion. A bank p a rticip a tin g in an autom ated clearin g house u sin g F ed era l R eserve fa cilities w ou ld send debit item s to the A C H on m agnetic tape. The A C H w ou ld sort-out the item s addressed to banks in the territories o f other F e d era l R eserve offices and then transm it the item s th rou gh a m em ber bank over the F ed era l R eserve C om m unications N etw ork. D ebit items in the area covered b y the A C H w ou ld continue to be handled b y the A C H . 5. On whose authority would an ordering bank initiate a debit item f the autom ated clea rin g house A ll p a rticip a n ts m ust agree beforeh a n d to the col ( A C H ) arran gem en ts in San F ra n cisco, L os A n geles lection o f fu n d s b y electron ic means. T his is w hat is an d A tla n ta . meant b y the au th orization and w a rra n ty discussed in S u b p a rt C (p a ra g ra p h 2 1 0 .7 5 ). These p rio r agree 2 . TJnder the definition section o f Subpart B , a “ tra n sferee” is defined to . include “ or other institu tions maintaining an account on the books o f a Federal Reserve B an k.” W hat is the significance o f this phrase f T his phrase appears in the F e d era l R eserve A c t and is used in existin g F e d e ra l R eserve regulations. It covers E d g e A c t C orp ora tion s and govern m en t d ep a rt m ents and agencies. In clu sion o f this phrase in S u b p a rt B does not in d ica te a n y intent b y the B o a rd to exten d the use o f nonm em ber clearin g accounts. 3. One section o f Subpart B ( paragraph 210.59(b) ) provides up to 10 business days fo r the holder o f a Federal R eserve clearing account to challenge w ritten advice o f a charge made to his account resulting from a credit transfer. W h y is such a lengthy period p ro vid ed ? T he B oa rd is recon sid erin g this p rov ision in the lig h t o f p u b lic com m ents received in response to the R egu la tion J p roposal. Q U E S T IO N S R E L A T I N G T O S U B P A R T C — D E B IT T R A N S F E R S 4. W hat is the anticipated use o f Subpart C ? S u b p a rt C w ou ld p erm it a m em ber bank to o r ig i nate sm all-dollar-value d ebit item s fo r collection ments are necessary since the im petus fo r a debit tra n sfer originates w ith a cred itor, rath er than the hold er o f an account. B e fo re an y debit item tran sfer, the ord erin g bank w ill w arrant that the cred itor who originates the tra n sfe r has obtained the agreem ent o f the payors fo r collection in this m anner, and that i f the p ay or ob jects the tran saction m ay be reversed. The p ro posed regu lation w ill be am ended to require such w arran ty, and the w a rra n ty and agreem ent process w ill be spelled out in Reserve B ank operating c ir culars. T here are tw o alternative m ethods that m ay be utilized fo r h an d lin g preauthorized debit entries. One such m ethod is fo r the h older o f an accou nt to file a w ritten authorization with his bank stating that his account m ay be ch arged fo r the benefit o f a cred itor in a stated am ount or fo r a stated purpose. The ac cou n t h older is, o f course, free to rescind this au th or ization at any time or to close his accou nt in that in stitu tion, thus in effect rescin d in g authorization. A second alternative m ethod, w hich substantially re duces the am ount o f p a p er w ork required, was d e velop ed in con n ection with autom ated clearin g house arrangem ents. U nder this alternative, the custom er has 45 days to rescind any debit transaction in his accou nt and thus is not requ ired to file a preau th or ization agreem ent w ith his bank. The w arran ty agreem ents envisioned w ou ld be sim i lar to arrangem ents n ow in place in the check collec tion system. F o r exam ple, a consum er n ow can make an arrangem ent w hich authorizes his insurance co m p a n y to originate a “ p re a u th o rize d ” instrum ent fo r the collection o f insurance prem ium s at stated in ter vals, and fo r his com m ercial bank to debit his accou nt fo r the am ount in dicated on the collection instrum ent. A ft e r the agreem ents are in place, the instrum ent is p rep ared at a set in terval b y the insurance com p an y and is paid by the co n su m e r’s bank based u p on the preau th orized agreem ents. G E N E R A L Q U E S T IO N S 6. W ho may originate debit and credit items un der the legal fram ework proposed in Subparts B and C? U nder S u bpart B , cred it items m ay be sent to a F ed era l R eserve office fo r transm ission on the F ed eral R eserve C om m unications N etw ork b y m em ber banks, the U. S. T reasu ry, E d g e A c t and A greem en t C o rp o rations, F ed era l R eserve Banks, in tern ation al o rg a n izations, fo re ig n correspon dents, and other in stitu tions authorized b y R eserve Banks. U n der S u bpart C, debit items m ay be originated and sent to a F ed era l R eserve office fo r transm ission on the F ed eral R eserve C om m unications N etw ork by m em ber banks and F ed era l R eserve Banks. O ther financial institutions cou ld pa rticip a te in these ar rangem ents throu gh a m em ber bank. 7. W ho may receive debit and credit items under the legal fram ework proposed in Subparts B and C ? A ll com m ercial banks and th r ift in stitu tions au th orized b y State or F e d e ra l law h a vin g regu la r or special ro u tin g num bers m ay receive debit and cred it item s th rou gh a m em ber bank. 8 . A re telephone instructions acceptable under Subpart B o f the proposed revised regulation? Y es, at the o p tio n o f the F ed era l R eserve B ank. 9. A re the proposed modifications to Regulation J associated with an earlier informal proposal to collect by wire all checks o f $ 10,000 and over f The $10,000 and over ch eck p ro p o sa l has no b ear in g on the p rop osed m odification s to R egu la tion J. The p rop osed regu la tion does not p ro v id e operating rules fo r co n v ertin g checks to electron ic fu n d s tran s fers. 10 . C urrently, there is a $1.50 charge to m ember banks fo r credit transfers o f less than $ 1,000 on the Federal R eserve Communications N etwork. W ill this charge continue under the operational fram ew ork proposed in Subparts B and C ? W h eth er the F e d e ra l R eserve sh ou ld ch arge f o r the use o f its fa cilities, an d u n d er w hat con d ition s, are issues raised fo r com m ent in the R egu la tion J p u b li cation. The $1.50 ch arge was ex ten d ed to d iscou rage use o f the w ire fa c ility fo r sm all tran sfers. T he p r o posed reg u la tion w ou ld make possible la rge volu m es o f such tran sfers, p ro v id e d th ey are fu lly autom ated. H ence, the p rev iou s charge has no relevan ce to this proposal.
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