[Federal Register Volume 63, Number 240 (Tuesday, December 15, 1998)]
[Proposed Rules]
[Pages 69027-69030]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33175]
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FEDERAL RESERVE SYSTEM
12 CFR Part 229
[Regulation CC; Docket No. R-1031]
Availability of Funds and Collection of Checks
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: The Board requests comment on the potential benefits and
drawbacks of a modification to its Regulation CC, Availability of Funds
and Collection of Checks, that would shorten the maximum hold for many
nonlocal checks. This modification would shorten the availability
schedule for nonlocal checks from five to four business days except
that a depositary bank could retain a five-day schedule for categories
of nonlocal checks for which it certifies that it does not receive a
sufficient proportion of returned checks within four business days.
This proposal is one of several alternative modifications to the
nonlocal check availability schedule that the Board is considering. The
Board may request comment on this or alternative modifications in a
future notice of proposed rulemaking after analyzing the comments
received in response to this notice.
DATES: Comments must be submitted on or before March 15, 1999.
ADDRESSES: Comments, which should refer to Docket No. R-1031, may be
mailed to Ms. Jennifer Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W.,
Washington DC 20551. Comments may also be delivered to the Board's mail
room between 8:45 a.m. and 5:15 p.m. on weekdays and to the security
control room at all other times. The mail room and the security control
rooms are accessible from the courtyard entrance on 20th Street between
Constitution Avenue and C Street, N.W. Comments will be available for
inspection and copying by members of the public in the Freedom of
Information Office, Room MP-500, between 9:00 a.m. and 5:00 p.m.
weekdays, except as provided in Section 261.14 of the Board's Rules
Regarding Availability of Information.
FOR FURTHER INFORMATION CONTACT: Jack K. Walton II, Manager, Check
Payments Section (202/452-2660) or Michele Braun, Project Leader (202/
452-2819), Division of Reserve Bank Operations and Payment Systems. For
the hearing impaired only, contact Diane Jenkins, Telecommunications
Device for the Deaf (TDD) (202/452-3544).
SUPPLEMENTARY INFORMATION:
I. Overview
As a result of concerns about some banks' practice of delaying
funds availability by placing holds on the proceeds of checks deposited
into customers' transaction accounts, Congress passed the Expedited
Funds Availability Act (EFAA) in 1987 (12 U.S.C. 4001-
4010).1 The EFAA specifies maximum time limits on the holds
that banks may place on funds deposited into transaction accounts.
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\1\ As used in this notice and in Regulation CC, the term bank
includes commercial banks, savings institutions, and credit unions.
Depositary bank refers to the bank of first deposit (see 12 CFR
Sec. 229.2 (e) and (o)).
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Prior to enactment of the EFAA, some banks had argued that their
availability schedules reflected the time needed for the collection and
return of checks that were not paid and provided a measure of
protection against the risk that the bank could not recover funds from
the depositor if those funds had already been withdrawn from the
depositor's account. To balance depositors' interest in receiving
prompt access to their funds with banks' ability to manage their risks,
Congress required the Board to reduce the EFAA's funds availability
schedules to as short a time as possible and equal to the period
achievable under the improved check clearing system for a receiving
depository institution to reasonably expect to learn of the nonpayment
of most items for each category of checks. (12 U.S.C. 4002(d))
The Board's Regulation CC (12 CFR part 229), which implements the
EFAA, includes maximum availability schedules for funds deposited into
transaction accounts as well as provisions designed to accelerate the
check return system. Currently, funds deposited by most nonlocal checks
(checks payable by banks located in different check processing regions
than the depositary bank) must be made available for withdrawal within
five business days (five-day availability).2 The Board is
investigating whether it would be appropriate to define separate
categories for various types of nonlocal checks so that it can assign
maximum availability schedules to these categories of nonlocal checks.
These categories would be designed to preserve hold periods as a fraud-
protection tool while providing depositors earlier access to their
funds. Analysis of available data suggests that several alternative
methods for defining categories of nonlocal checks might reasonably
meet the Congressional mandate. Several of these alternatives rely on
data collected by the Reserve Banks. One alternative relies on data
collected by depositary banks that elect to use the full five-day hold
period for some nonlocal checks.
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\2\ Under Regulation CC's temporary availability schedule, which
was in effect from September 1, 1988, through August 31, 1990, funds
deposited by most nonlocal checks had to be made available for
withdrawal within seven business days. Other than the change from
the temporary to the current, permanent schedule, the EFAA's
nonlocal check availability schedules have not been modified since
the EFAA was enacted. During this period, the Federal Reserve has
consolidated several of its check processing regions, listed in
Regulation CC's Appendix A, which has resulted in some checks being
reclassified from nonlocal to local. Thus, the availability that
must be accorded to some deposits has improved.
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The purpose of this notice is to gather information on the
potential benefits and drawbacks of this latter alternative for
assigning availability schedules to categories of checks because it
relies on a self-certification procedure that differs from the approach
the Board has previously used in Regulation CC. Based on its analysis
of the comments to this notice, the Board will assess the feasibility
of this method and may request comment on one or more specific
regulatory proposals to modify the nonlocal check availability
schedule.
[[Page 69028]]
II. Background
When Congress established the EFAA funds availability schedules, it
attempted to balance banks' concerns about managing their risk with
consumers' concerns about the availability of their funds. Congress
recognized that banks would be exposed to risks if they were required
to make funds available before they had a reasonable opportunity to
learn of the return of an unpaid check.
Congress's 1987 Conference Report on the EFAA tied availability
schedules to banks' ability to reasonably expect to learn of the
nonpayment of a significant number of checks. The Report suggested that
if improvements in the check clearing system make it possible for two-
thirds of the items in a category of checks to meet this test in a
shorter period of time, then the Federal Reserve must shorten the
schedules accordingly.3 The Board has considered this ``two-
thirds test'' in evaluating alternative amendments to Regulation CC
that would implement the statutory requirement for shortened
availability schedules for nonlocal checks.
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\3\ H.R. Conf. Rep. No. 100-261, at 179 (1987).
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The Conference Report also recognized that geographic proximity or
transportation arrangements between check processing regions would
permit the Federal Reserve to provide shorter times than the general
schedule for nonlocal checks would require. The Conference Report noted
that shorter times would be possible for checks transported between
such nearby territories as New York City and Jericho, Long Island, and
for checks transported between banks in cities with Federal Reserve
check processing offices, such as banks in Boston and San
Francisco.4 The Board recognized regional differences in the
times needed to return checks in Regulation CC by establishing appendix
B-1 under the temporary schedule and appendix B-2 under the permanent
schedule.5 Appendix B-1 identified Federal Reserve check
processing regions in which depositary banks were required to make
funds from specified nonlocal checks available within four or five
business days from the day of deposit, compared with the seven business
days otherwise applicable under the temporary schedule. Appendix B-2
provided a similar listing for nonlocal checks for which proceeds must
be made available within three business days from the day of deposit
rather than the five days otherwise applicable under the permanent
schedule.6
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\4\ H.R. Conf. Rep. No. 100-261, at 179 (1987).
\5\ Appendix B-1 was removed and appendix B-2 was redesignated
as appendix B in 1995 (60 FR 51669, Oct. 3, 1995).
\6\ Locations were included in these appendixes based on an
informal survey of the transportation arrangements that existed when
Regulation CC was developed.
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III. Shortening the Nonlocal Check Availability Schedule
The Board is currently considering whether the check clearing
system has improved sufficiently to warrant amending Regulation CC to
require that funds deposited by nonlocal checks be made available
earlier than now provided. The legislative history does not indicate
whether the Board should interpret the two-thirds test precisely, and
the EFAA requirement that the Board reduce maximum holds to as short a
time as possible in which a bank could reasonably expect to learn of
the nonpayment appears to provide the Board with some discretion. The
Board is also exploring various methods that are reasonable and cost
effective for defining categories of nonlocal checks for the purposes
of determining appropriate funds availability schedules.
A. Returned Check Surveys
The Board drew on data from four surveys to determine whether it
would be appropriate to reduce the nonlocal hold period. In 1996, the
Board's comprehensive survey of check-fraud losses at banks asked
respondents to indicate the proportion of returned checks that they
typically received on each business day following the initial deposit
of a check (1996 bank survey). In conjunction with that check-fraud
study, Federal Reserve staff also collected detailed data from a sample
of checks processed during one week through the Federal Reserve Banks
(1996 Reserve Bank survey).7 In 1997, Federal Reserve staff
repeated the Reserve Bank survey for six weeks and thereby increased
the number of nonlocal returned checks sampled compared with the prior
survey (1997 Reserve Bank survey).8 The results of the 1997
survey were generally consistent with those of the 1996 survey. For
historical comparison, the Board also reviewed a survey of checks
returned through the Reserve Banks conducted shortly after the
implementation of Regulation CC (1990 Reserve Bank survey).9
The table below summarizes the average nonlocal return cycles observed
in the 1990, 1996, and 1997 surveys.
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\7\ Report to the Congress on Funds Availability Schedules and
Check Fraud at Depository Institutions (Board of Governors of the
Federal Reserve System, October 1996).
\8\ The 1997 survey was designed to provide a sufficient number
of checks to estimate the proportion of nonlocal checks returned
within four and five days nationwide. The sample was not intended to
provide statistically valid results between each possible pairing of
check processing regions throughout the country (previously
unpublished 1997 Reserve Bank data).
\9\ Report to Congress Under the Expedited Funds Availability
Act (Board of Governors of the Federal Reserve System, March 1990).
Cumulative Percentage of Nonlocal Checks Returned Within Number of Business Days
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Percent
1997 reserve 1996 reserve 1996 bank 1990 reserve improvement
bank survey \1\ bank survey \1\ survey bank survey 1990-97
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3 business days.............. 27.8 33.3 32.0 21.0 32.4
4 business days.............. 59.9 64.1 64.9 47.0 27.5
5 business days.............. 82.8 83.3 84.3 73.0 13.4
Number of nonlocal checks
sampled..................... 31,646 5,707 \2\ 773 n.a. n.a.
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\1\ Excludes outlier observations defined as nonlocal checks that exceed 15 business days. For example, the 1997
survey data exclude 1.6 percent of nonlocal checks sampled.
\2\ Reflects the number of commercial banks, savings institutions, and credit unions sampled. Source. Board of
Governors of the Federal Reserve System. See text notes 7, 8, and 9 for sources of data.
In the 1996 and 1997 surveys, over eighty percent of nonlocal
unpaid checks were returned to the depositary bank within the maximum
availability period of five business days, up from 73 percent in 1990.
The percentage of nonlocal checks returned unpaid within four business
days ranged from 60 to 65 percent in the 1996 and 1997 surveys,
[[Page 69029]]
roughly a 30 percent improvement over 1990. Although returns within
four days remained slightly below two-thirds, they were close to that
threshold. The survey results suggest that it may be appropriate for
the Board to reduce availability schedules for all or some categories
of nonlocal checks from five business days to four.10
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\10\ The General Accounting Office (GAO) recently conducted a
study to identify, among other things, whether electronic check
presentment affects the length of time necessary for a dishonored
check to be returned to the depositary bank. The GAO concluded that
the check return performance of electronically presented nonlocal
checks was not very different from that of physically presented
checks. (U.S. General Accounting Office, GAO Report, Retail Payment
Issues: Experience with Electronic Check Presentment, (July 14,
1998)).
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B. Alternative Approaches
In developing guidelines to identify categories of nonlocal checks
that could be subject to shorter availability schedules, the Board
sought to define as precisely as possible those check categories
returned to the depositary bank in fewer than five days at least two-
thirds of the time, taking into consideration the practical limitations
of the data collection needed to support the categorization.
Identifying a large number of categories of nonlocal checks should
increase the likelihood that the checks are accurately categorized
based on when they are returned. The greater accuracy afforded by a
large number of categories would lower the risk that a particular check
would have to be made available before it would normally be returned.
Similarly, a higher degree of accuracy would increase the probability
that customers would receive faster availability for those checks that
are normally returned within fewer than five days. Thus, a large number
of categories of nonlocal checks should provide a better balance, as
sought by Congress, between banks' needs to manage their fraud-loss
risk and their customers' interests in having as early access to their
funds as possible.
The Board has been exploring alternative approaches for defining
appropriately precise categories of nonlocal checks that should receive
earlier availability. These approaches range from categorizing the
almost 2,000 possible pairs of check processing regions to a more
aggregated approach that would group nonlocal checks into only three
categories nationwide based on the availability zone (city, RCPC, or
country) of the paying bank.11 Each approach recognizes the
roles of geographic proximity and transportation arrangements in the
check clearing and return cycle. It is not clear, however, what might
be the most appropriate (reasonable and cost effective) way to identify
those categories of nonlocal checks that should receive earlier
availability. Collecting data, however, to support a valid analysis of
return cycles for nonlocal checks becomes increasingly expensive and,
in some cases, impractical as the number of categories
increases.12
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\11\ In general, nonlocal checks payable by banks located
closest to Federal Reserve check processing offices are returned
fastest. Nonlocal checks payable by banks located further away
require somewhat more time. The first four digits of the routing
number (the routing symbol) on every check identify the location of
the paying bank in relationship to the local Federal Reserve office.
The locations are organized roughly in concentric circles. City
checks are payable by banks located relatively close to a Federal
Reserve office, RCPC checks are payable by banks located somewhat
further from a Federal Reserve office, and country checks are
payable by banks even more geographically remote. Only eight of
forty-four check processing regions have country availability zones.
\12\ While the alternatives thus far analyzed rely on data
collected from nonlocal checks returned through a Federal Reserve
Bank, the results of the 1996 bank and the 1996 Reserve Bank surveys
suggest that there is little difference between nonlocal return
times for checks returned through the Reserve Banks and for all
nonlocal returned checks.
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The Board is considering reducing the availability schedules for
nonlocal checks from five to four business days but permitting an
individual bank to delay funds availability for a particular category
of nonlocal check for five business days if it certifies that it does
not receive at least two-thirds of nonlocal returned checks in that
category within fewer than five days. This approach would match the
bank's actual return experience for nonlocal checks with permitted
availability schedules more precisely than any approach that relies on
data that the Reserve Banks could collect. Under this alternative,
banks that wished to use a five business day availability schedule for
a category of checks would be required to conduct their own periodic
data collection, based on criteria that would be included in Regulation
CC, and to certify that they do not receive at least two-thirds of that
category of nonlocal returned checks in fewer than five
days.13 The bank's primary supervisor would be responsible
for reviewing the self-certification and supporting data.
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\13\ If a bank imposes an exception hold on a customer's deposit
in accordance with Sec. 229.13, it may extend the time within which
it is required to make funds available for withdrawal by a
reasonable period. Regulation CC deems a six business day extension
of its nonlocal check available schedule to be reasonable; a longer
extension may be reasonable, but the bank has the burden of so
establishing. This safe-harbor extension would be added to the four-
day nonlocal check schedule or to the five-day schedule for those
categories of nonlocal checks that a bank certifies are eligible for
the longer hold.
A bank that has a policy of generally making deposited funds
available for withdrawal sooner than required may extend the hold up
to the time allowed by the regulation on a case-by-case basis.
(Under Sec. 229.16(c), a bank must provide a notice when funds from
a particular deposit will not be available by the time a bank
generally make funds available for withdrawal.) A bank would be
permitted to hold a nonlocal check on a case-by-case basis up to
five business days for those categories of nonlocal checks that the
bank certifies are eligible for the longer hold.
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Permitting a bank to certify that it qualifies to use five-day
availability schedules for some categories of nonlocal checks gives it
the flexibility to weigh; (1) the costs of collecting data with which
to certify that it should be permitted to hold certain categories of
nonlocal checks for five days, (2) the fraud risk associated with its
hold policy, and (3) the customer benefits of that policy. If a bank
determines, for example, that the administrative cost associated with
demonstrating that certain categories of nonlocal checks should be
subject to five-day availability and the resulting increased complexity
of its availability schedules outweighs the incremental fraud
protection, then it could simply adopt a four-day or shorter schedule
for all of its nonlocal check deposits.14
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\14\ The Board's 1996 check-fraud study found that 70 percent of
banks make funds deposited by nonlocal checks available to their
customers earlier than Regulation CC now requires. Report to the
Congress on Funds Availability Schedules and Check Fraud at
Depository Institutions, p. 39.
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IV. Request for Comment
The Board requests comment on the benefits and drawbacks of
modifying Regulation CC to shorten the availability schedule for
nonlocal checks from five business days to four unless a depositary
bank certifies that it does not receive most of its nonlocal returned
checks in fewer than five business days. Commenters' overall
perspectives on the issues raised in this notice as well as their
answers to the specific questions listed below will be useful in the
Board's analysis of the alternative approaches to modify the nonlocal
check availability schedules. Comments will help the Board balance
consumers' interests in receiving access to their funds and banks'
interest in minimizing check-fraud losses and will help the Board
develop an appropriate method to implement Congress's directive to
improve funds availability to match improvements in the check clearing
system.
The Board does not plan to implement any changes to Regulation CC's
nonlocal check availability schedules prior to the spring of 2000 so
that banks can minimize changes to
[[Page 69030]]
their internal systems during the period surrounding the century
rollover.
A. Defining Categories of Checks
For the purpose of assigning availability schedules, the Board is
exploring several methods for categorizing nonlocal checks that rely on
the check processing region and the availability zones in which banks
are located. Because proximity and transportation infrastructure affect
the time period needed to present and return nonlocal checks, the Board
is considering several possible methods to define categories of
nonlocal checks, including:
(a) Pairs of check processing regions, for example checks deposited
at banks in the Columbus check processing region and payable by banks
located in the Utica check processing region;
(b) The check processing region of the depositary bank and the
availability zone of the paying bank, for example checks deposited at
banks in the Columbus check processing region and payable by nonlocal
banks in city availability zones; and
(c) The availability zone of the paying bank, regardless of the
location of the depositary bank, that is, any check payable by a
nonlocal bank located in a city availability zone.
Regulation CC could be modified to define appropriate categories of
nonlocal checks for the analysis of return cycles. Alternatively, the
regulation could permit banks to define their own categories, perhaps
within some guidelines.
1. Should Regulation CC define categories of checks for which a
bank could certify that it should be permitted to hold funds for five
days? If yes, what categories would be appropriate? If not, should a
bank be permitted to define its own categories or select from among a
variety of categories?
2. Given the pace of change in the improvement of the check
clearing system, how frequently should a bank be required to re-certify
that it should be permitted to withhold the funds availability of a
category of nonlocal returned checks for five business days? Every two
years? Every five years? Some other time period?
B. Bank Hold Policies
3. If this approach is adopted, to what extent will banks use the
certification process to continue placing five-day holds on certain
categories of nonlocal checks to protect themselves against some check-
fraud losses?
C. Data Collection and Statistical Significance
Under the approach being considered in this notice, the Board
anticipates requiring banks to use the two-thirds test indicated by
Congress to assess whether a category of nonlocal checks at a bank
should be subject to four- or five-day availability. Banks that choose
to hold some categories of checks for five business days would be
required to collect representative data that demonstrates that, for
those categories of checks, they do not receive two-thirds of the
returned nonlocal checks within four business days.
4. What information should a bank be required to collect to certify
that it does not receive at least two-thirds of a category of nonlocal
returned checks within four business days? What would constitute
representative data for a bank and over what period should it be
collected? What procedures would reasonably ensure that a bank
appropriately certifies that it is eligible to use five-day holds?
Should the same methodology apply to small, medium, and large banks?
5. Do banks currently collect the data needed for certification?
D. Consumer Disclosures
Section 229.16(a) of Regulation CC provides that disclosures
reflect the policy followed by the bank in most cases. The commentary
to that section provides that a bank may not place a hold longer than
the period disclosed. Therefore, a bank that discloses that it
generally makes funds from nonlocal checks available in four business
days but certifies that it is eligible to use the five-day availability
schedule for some categories of nonlocal checks would have to disclose
which categories of nonlocal checks would be available in five business
days.15
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\15\ In contrast, based on guidance in the supplementary
information to the Board's notice adopting the initial Regulation
CC, a bank that discloses that it generally makes funds from
nonlocal checks available in five business days would have to
disclose the reduction in schedules to customers only upon request.
(53 FR 19400, May 27, 1988)
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6. If the proportion of nonlocal checks available in five business
days does not represent ``most cases,'' to what extent would the
complexity of the disclosure requirement affect a bank's decision to
use five-day availability for some categories of nonlocal checks?
7. What amendments to the disclosure rules would assist banks in
adopting a policy to hold some categories of nonlocal checks for four
days and others for five days as well as assist customers to understand
which nonlocal checks would be available for withdrawal in four days
and which in five days? Would it be sufficient to provide detailed
information as to which checks will receive four or five day
availability only when requested by a customer or prospective customer?
By order of the Board of Governors of the Federal Reserve
System, December 9, 1998.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-33175 Filed 12-14-98; 8:45 am]
BILLING CODE 6210-01-P
