[Federal Register Volume 64, Number 36 (Wednesday, February 24, 1999)]
[Proposed Rules]
[Pages 9105-9107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4600]
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FEDERAL RESERVE SYSTEM
12 CFR Part 229
[Regulation CC; Docket No. R-1034]
Availability of Funds and Collection of Checks
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule.
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SUMMARY: The Board is requesting comment on options for amending
Subpart C of Regulation CC, which contains rules governing the
collection and return of checks. The proposed options would amend
Subpart C's provisions on sending notices in lieu of returning the
original checks. The proposal is intended to provide more flexibility
to depository institutions to experiment with methods to return checks
electronically.
DATES: Comments must be submitted on or before April 30, 1999.
ADDRESSES: Comments, which should refer to Docket No. R-1034, may be
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th and C Streets, NW, Washington, D.C. 20551.
Comments addressed to Ms. Johnson also may be delivered to the Board's
mail room between 8:45 a.m. and 5:15 p.m. and to the security control
room outside of those hours. Both the mail room and the security
control room are accessible from the courtyard entrance on 20th Street
between Constitution Avenue and C Street, NW. Comments may be inspected
in Room MP-500 between 9:00 a.m. and 5:00 p.m.
FOR FURTHER INFORMATION CONTACT: Oliver I. Ireland, Associate General
Counsel (202/452-3625), Stephanie Martin, Senior Counsel (202/452-
3198), Legal Division. For the hearing impaired only, contact Diane
Jenkins, Telecommunications Device for the Deaf (TDD) (202/452-3544),
Board of Governors of the Federal Reserve System, 20th and C Streets,
NW, Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION:
Background
Subpart C of the Board's Regulation CC (12 CFR Part 229) contains
rules governing the collection and return of checks. These rules are
intended to expedite the check collection and return process, thereby
reducing risk to banks 1 and their customers. Regulation CC
was designed to work in accord with the state law check-collection
rules in Articles 3 and 4 of the Uniform Commercial Code (U.C.C.),
although in some areas the regulation preempts the U.C.C.
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\1\ In Regulation CC and its Commentary, as well as in this
docket, the term ``bank'' refers to all depository institutions,
including commercial banks, savings institutions, and credit unions.
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When a paying bank decides to return a check, the U.C.C. and
Regulation CC require it to send the check or a notice within certain
deadlines.2 If a check is unavailable for return, U.C.C. 4-
301(a) allows a paying bank to charge back the check by revoking
provisional settlement based on a ``notice of dishonor'' (or a ``notice
of nonpayment'' where the check is returned for reasons other than
dishonor). The U.C.C. would appear to allow a paying bank to return a
notice when a check has been truncated. The Official Comment to U.C.C.
4-301 states that an item may be considered unavailable for return if
it is retained by the collecting bank in accordance with a bank check
retention plan.
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\2\ The paying bank must initiate the return by midnight of the
banking day following the day the check was presented (U.C.C. 4-
301). The paying bank must return the check so that it reaches the
depositary bank expeditiously, in accordance with Sec. 229.30(a) of
Regulation CC.
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Regulation CC (Secs. 229.30(f) and 229.31(f)) establishes a
``notice in lieu of return,'' which substitutes for the original check
and carries value. The ``notice-in-lieu'' provisions of Regulation CC
provide that the paying (or returning) bank must return the original
check unless the check is unavailable, in which case the bank may
return a copy of the front and back of the check, or, if no such copy
is available, a written notice containing specified information about
the check. The Commentary to Secs. 229.30(f) and 229.31(f) states that
notice in lieu of return is permitted only when a bank does not have
and cannot obtain possession of the check or must retain possession of
the check for protest. The Commentary explains that a check is not
unavailable for return if it is merely difficult to retrieve from a
filing system or from storage by a keeper of checks in a truncation
system.
[[Page 9106]]
Regulation CC (Sec. 229.37) permits the parties to a check to vary
the notice-in-lieu provisions; however, an agreement under Regulation
CC cannot affect banks or customers that are not party to the agreement
or otherwise bound by it. The Regulation CC variation-by-agreement
provision differs from the corresponding language in U.C.C. 4-103 in
that the U.C.C. allows Federal Reserve regulations and operating
circulars, clearinghouse rules, and the like to be effective as
agreements whether or not specifically assented to by all interested
parties.3 Regulation CC does not incorporate the U.C.C.'s
special treatment for Federal Reserve rules and operating circulars and
clearinghouse rules but does not affect the status of such rules and
circulars under the U.C.C.
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\3\ The Official Comment to U.C.C. 4-103 (note 3) indicates,
however, that there are limitations on the scope of clearinghouse
rules' ability to bind non-assenting parties.
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Private-sector payments system participants have requested that the
Board clarify the interrelationship of Regulation CC and the U.C.C.
They have questioned whether Regulation CC limits a clearinghouse's
ability to bind non-assenting third parties to a check truncation
system under which the depositary bank would receive a notice, such as
in the form of an electronically-produced check image, in lieu of the
return of the original check. These payments system participants stated
that resolving uncertainty in this area could lead to greater
experimentation and innovation in the provision of payments services.
The Board wishes to support development of new payments services
and to take steps to remove any federal regulatory impediments to
innovation in the payments area where appropriate. The Board is,
therefore, requesting comment on options for amending Regulation CC
and/or its Commentary to clarify the permissibility of notices in a
check truncation environment instead of return of the actual check. The
Board will consider the proposed regulatory changes in light of its
statutory authority and responsibilities under section 609 of the
Expedited Funds Availability Act (12 U.S.C. 4008(c)) to regulate any
aspect of the payment system, including the check collection and return
system, in order to carry out the provisions of the Act. The Board will
consider the associated benefits and burdens of a regulatory change to
the payment system as a whole as well as the implications for each
party to a payment transaction affected by the rule. The Board also
requests comment on whether there are other options that would be more
appropriate than the two discussed below.
Options for Notices in Lieu of Return
The Board is considering two options for amending the Regulation CC
provisions on notices in lieu of return. The Board requests comment on
the feasibility of these options, whether either of the options would
remove impediments to the development of a more efficient payments
mechanism, and the advantages and disadvantages of each option to the
various participants in the check system, including depositary banks,
intermediary banks, paying banks, drawers, depositors, and non-
depositor payees.
Option One. One of the purposes of subpart C of Regulation CC was
to speed up the check return system that existed under the U.C.C. The
U.C.C. contemplates that the paying bank will return a check to the
presenting bank, which in turn will charge back the check against the
prior collecting bank, and so on back up the forward collection chain
until the check reaches the depositary bank. Regulation CC eliminated
the requirement that returned checks follow the forward collection
chain. Under Regulation CC, the paying bank may send the returned check
directly to the depositary bank or to any returning bank, even if that
bank did not handle the check for forward collection.
Regulation CC did not prohibit the return of checks back through
the forward collection chain, but rather authorized banks to use a more
efficient and direct route. Accordingly, one interpretation of
Regulation CC is that banks may continue to return checks in accordance
with the U.C.C. charge-back rules and the corresponding rules governing
when notice may be sent instead of the original check, subject to
Regulation CC's expeditious return requirements. Under this
interpretation, banks would need to follow the notice-in-lieu
provisions of Regulation CC only if they wished to return the check
through a route other than the forward collection chain. As noted
above, the U.C.C. Official Comment indicates that the U.C.C. would
allow return of a notice rather than the physical check in the event
the check is being stored in accordance with a check retention system.
The Board could amend the Commentary to reflect this interpretation
of the interplay of Regulation CC and the U.C.C. by stating that banks
could send a notice of dishonor or nonpayment under the provisions of
U.C.C. 4-301 when they return the notice through the forward collection
chain, as contemplated in the U.C.C. The U.C.C. notices would be
subject to the Regulation CC expeditious return rules. This proposal
would clarify that banks can avail themselves of the U.C.C. rules
regarding return of notices to the same extent they could before
Regulation CC was adopted. This interpretation, however, may not
provide relief for check truncation or image systems if returns do not
follow the forward collection chain.
This option could also have consequences for the depositors or
payees of the checks in that they would receive notices of returns
rather than the original checks on a more frequent basis. They may have
difficulty recovering from the drawers if they cannot obtain the
original checks. Furthermore, despite the fact that the depositary bank
could charge back its customer's account based on the notice in
accordance with U.C.C. 4-214(a), the customer may, as owner of the
check, ultimately have the right to possession of the check.
Option Two. Another approach would be for the Board to delete the
Regulation CC Commentary language that explains when a check is
unavailable for return. Specifically, the Board could remove the
following provisions in the Commentary to Secs. 229.30(f) and
229.31(f):
Notice in lieu of return is permitted only when a bank does not have
and cannot obtain possession of the check or must retain possession
of the check for protest. A check is not unavailable for return if
it is merely difficult to retrieve from a filing system or from
storage by a keeper of checks in a truncation system.
Instead of this language, the Commentary to those sections could
indicate that notices in lieu of return are permissible whenever they
would be permissible under the U.C.C.
The advantage of this option is that it would liberalize the
circumstances under which banks could use notices in lieu of return and
potentially make it easier for banks to establish electronic check
return mechanisms that feature check truncation. The disadvantage of
this option is that it would force depositary banks to accept notices
from banks with whom they may have no established relationship. Under
the U.C.C. charge-back system, banks receive returned checks or notices
only from those banks to whom they sent the check for forward
collection. Under Regulation CC, a return could come directly from the
paying bank or from an unfamiliar returning bank. Banks in the past
have expressed concern about the quality of some notices of nonpayment.
[[Page 9107]]
Some have stated that they are reluctant to charge back their
customers' accounts on the basis of notices of nonpayment but prefer to
wait for the return of the original check. Under this option, the
return of a notice in lieu of an original check could become more
prevalent, and the depositary bank would have to charge back based on
that notice, as the original check might never be returned. Notices in
the form of an electronically-produced check image, however, may be
more reliable than other types of notices that describe the check,
depending on the quality of the image. This option could also have
consequences for the depositors or payees of the checks as discussed
above under option one.
Amendment Regarding Electronic Check Presentment Agreements
The Board is also proposing to delete Sec. 229.36(c) of Regulation
CC and its associated Commentary, which states that a bank may present
a check electronically under an agreement with the paying bank and that
the agreement may not extend return times or otherwise vary the
provisions of Regulation CC with respect to persons not party to the
agreement. This provision of the regulation is subsumed by the
variation-by-agreement provisions in Sec. 229.37, and the Board
believes it is unnecessary and potentially confusing to retain special
provisions regarding a particular type of variation by agreement. The
Board proposes to add an example to the Commentary to Sec. 229.37
listing an electronic check presentment agreement as a permissible
variation by agreement under Regulation CC. Eliminating Sec. 229.36(c)
and its Commentary would result in no substantive change to the
regulation regarding the validity of electronic presentment agreements.
Initial Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 603) requires an agency to
publish an initial regulatory flexibility analysis with any notice of
proposed rulemaking. Two of the requirements of an initial regulatory
flexibility analysis, a description of the reasons why action by the
agency is being considered and a statement of the objectives of, and
legal basis for, the proposed rule, are contained in the supplementary
material above. The proposed rules require no additional reporting,
recordkeeping, or other compliance requirements and do not overlap with
other federal rules. The proposed rule would apply to all depository
institutions and other entities who participate in the check collection
system, regardless of size. The Board believes that the proposed rule
could result in depositary banks (of all sizes) being required to
accept more notices in lieu of returned original checks and has
requested comment on the burdens associated with that aspect of the
proposal. The Board believes, however, that it would not be feasible to
create different check return rules for large and small banks, and
therefore no alternatives for small banks were considered.
List of Subjects in 12 CFR Part 229
Banks, banking, Federal Reserve System, Reporting and recordkeeping
requirements.
For the reasons set forth in the preamble, 12 CFR Part 229 is
proposed to be amended as set forth below:
PART 229--AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS
(REGULATION CC)
1. The authority citation for part 229 continues to read as
follows:
Authority: 12 U.S.C. 4001 et seq.
2. In Sec. 229.36, paragraph (c) is removed and reserved.
Option one
3a. In Appendix E, under section XVI, paragraph F.2. is revised to
read as follows:
Appendix E to Part 229--Commentary
* * * * *
XVI. Section 229.30 Paying Bank's Responsibility for Return of
Checks
* * * * *
F. * * *
2. Sending a notice in lieu of return in accordance with this
section satisfies the requirements of U.C.C. 4-301(a) to send a
notice of dishonor or nonpayment. A paying bank could also send a
notice in accordance with U.C.C. 4-301(a) (which requires returned
checks and return notices to flow back through the forward
collection chain) if it did not wish to avail itself of the
provisions of this section, provided that the notice met the
expeditious return requirements of this section. Reference in the
regulation and this commentary to a returned check includes a notice
in lieu of return under this section or a notice of dishonor or
nonpayment under U.C.C. 4-301(a) unless the context indicates
otherwise.
* * * * *
End of Option one
Option two
3b. In Appendix E to part 229, under section XVI, paragraph F. 1.
is amended by removing the fifth and sixth sentences and by adding a
new sentence after the fourth sentence to read as follows:
XVI. Section 229.30 Paying Bank's Responsibility for Return of
Checks
* * * * *
F. * * *
1. * * * This paragraph adopts the standards of U.C.C. 4-301(a)
as to when a check is unavailable for return. * * *
* * * * *
3c. In Appendix E, under section XVII, the second and third
sentences of paragraph F.1. are removed.
End of Option Two
4. In Appendix E, under section XXII, paragraph C. is removed and
reserved.
5. In Appendix E, under section XXIII, a new paragraph C.9. is
added to read as follows:
XXIII. Section 229.37 Variations by Agreement
* * * * *
C. * * *
9. A presenting bank and a paying bank may agree that
presentment takes place when the paying bank receives an electronic
transmission of information describing the check rather than upon
delivery of the physical check. (See Sec. 229.36(b).)
* * * * *
By order of the Board of Governors of the Federal Reserve
System, February 19, 1999.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 99-4600 Filed 2-23-99; 8:45 am]
BILLING CODE 6210-01-P
