[Federal Register Volume 59, Number 85 (Wednesday, May 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10645]
[[Page Unknown]]
[Federal Register: May 4, 1994]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 210
[Regulation J; Docket No. R-0821]
Collection of Checks and Other Items by Federal Reserve Banks and
Funds Transfers Through Fedwire
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Board is adopting amendments to subpart A of its
Regulation J, governing collection of checks and other items by Federal
Reserve Banks. The amendments, in general, conform the warranties and
various other provisions of Regulation J to recent amendments to
Regulation CC or to the Uniform Commercial Code.
EFFECTIVE DATE: June 6, 1994.
FOR FURTHER INFORMATION CONTACT: Oliver I. Ireland, Associate General
Counsel (202/452-3625), or Stephanie Martin, Senior Attorney (202/452-
3198), Legal Division; for the hearing impaired only:
Telecommunications Device for the Deaf, Dorothea Thompson (202/452-
3544).
SUPPLEMENTARY INFORMATION: Subpart A of the Board's Regulation J (12
CFR part 210) governs the collection of checks and other items by
Federal Reserve Banks. Regulation J sets out the warranties made by
institutions that send items for collection through the Federal Reserve
System as well as warranties made by Reserve Banks.1 Regulation J
also covers liability for breach of warranty, presentment of and
settlement for cash items and returned checks, and other related
issues.
---------------------------------------------------------------------------
\1\As used in this docket, sender means any institution that
sends a check to a Reserve Bank for collection, and bank includes
all depository institutions, such as commercial banks, savings
institutions, and credit unions.
---------------------------------------------------------------------------
In October 1992, the Board published amendments to its Regulation
CC (12 CFR part 229) that require paying banks to make same-day
settlement for certain checks presented by private-sector banks,
effective January 3, 1994 (57 FR 46956, October 14, 1992). As part of
these amendments, the Board revised the Regulation CC warranties to
require private-sector collecting, returning, and presenting banks to
warrant the accuracy of cash letter totals and check encoding. In
December 1993, the Board published proposed amendments to Regulation J
to clarify that the Reserve Banks and institutions that send items to
Reserve Banks also make the Regulation CC warranties, to conform
certain Regulation J provisions to the 1990 version of the Uniform
Commercial Code (U.C.C.), and to make other minor changes (58 FR 68566,
December 28, 1993). The Board received 10 comments on the proposed
amendments, which are discussed in the section-by-section analysis
below.
The Board has established procedures for assessing the competitive
impact of changes that have a substantial effect on payments system
participants.2 Under these procedures, the Board assesses whether
the proposed regulatory changes would have a direct and material
adverse effect on the ability of other service providers to compete
effectively with the Federal Reserve Banks in providing similar
services due to differing legal powers or constraints or due to a
dominant market position of the Federal Reserve deriving from such
legal differences. The Regulation J amendments are largely technical,
clarifying, or conform Regulation J to the rules applicable to private-
sector banks under Regulation CC and the U.C.C. The Board believes that
the amendments would not have a direct and material adverse effect on
the ability of others to compete effectively with the Federal Reserve
Banks.
---------------------------------------------------------------------------
\2\These procedures are described in the Board's policy
statement ``The Federal Reserve in the Payments System'' (55 FR
11648, March 29, 1990).
---------------------------------------------------------------------------
Section-by-Section Analysis
Section 210.1
This section sets forth the authority, purpose, and scope of
subpart A of Regulation J. At the suggestion of one commenter, the
Board is updating the authority citations in this section to conform
with the authority citations in the CFR. Specifically, the Board has
added a citation to section 11(j) of the Federal Reserve Act, which
authorizes the Board to exercise general supervision over the Reserve
Banks.
Section 210.2(g)
The Board proposed to amend the definition of ``item'' in keeping
with the definition of ``item'' in U.C.C. Sec. 4-104(a)(9). Under the
amended language, ``item'' would expressly include promises or orders,
such as certain bonds or other investment securities, that are handled
through the bank collection system. The Board received no comments on
this section and has adopted the amendment as proposed.
Section 210.2(p)
The Board proposed to add a definition of ``Uniform Commercial
Code'' that conforms to the definition in Regulation CC (12 CFR
229.2(ii)). The Board received no comments on this section and has
adopted the amendment as proposed.
Section 210.3(a)
The Board proposed to amend this section to set forth more
accurately the scope of the Federal Reserve Banks' operating circulars,
which include provisions for service terms and adjustments. The
amendment specifies that the operating circulars may include provisions
for adjustments of amounts, waiver of expenses, and payment of interest
by as-of adjustment.
One commenter believed that the proposed change, at least as it
relates to Reserve Bank adjustment practices, impedes the ability of
correspondent banks to compete with the Reserve Banks. This commenter
stated that the adjustment accounting practices of its local Reserve
Bank require intercept processors and depository institutions to engage
in a burdensome reconcilement process. The commenter stated that the
Board should not incorporate the operating circulars into Regulation J.
The proposed amendments, however, would not incorporate the
operating circulars into Regulation J, but rather would provide greater
detail as to the scope of the operating circulars. Issues related to
adjustment posting alternatives generally can be settled between the
Reserve Bank and the parties involved and would not be affected by the
proposed amendment to Regulation J. Thus, the Board has adopted the
amendment as proposed.
Section 210.3(f)
The Board proposed to add a new paragraph to Sec. 210.3 to clarify
that Regulation J supersedes the U.C.C., other state laws, and
Regulation CC to the extent of any inconsistency. This provision
parallels Sec. 229.41 of Regulation CC, which provides that Regulation
CC supersedes the U.C.C. and other state law to the extent of the
inconsistency. The Board received no comments on this section and has
adopted the amendment as proposed.
Section 210.5(a)
The Board proposed to amend Sec. 210.5(a) to conform the warranties
made by banks that send items to Reserve Banks to the transfer and
presentment warranties in U.C.C. 4-207 and 4-208. A sender would
warrant that it was (or acted on behalf of a person who was) entitled
to enforce the item. The U.C.C. substituted the concept of ``person
entitled to enforce'' for ``person with good title'' in recognition
that the right to enforce an instrument is not limited to holders. In
addition, the proposed amendment would require the sender to warrant
that the item was not altered, dropping the adverb ``materially.'' The
U.C.C. formerly incorporated the concept of a ``material'' alteration
as one that changed the contract of the parties in any respect. The
revised U.C.C. refers to such a change simply as an alteration.
Finally, the proposed amendment would clarify that the sender also
makes the warranties set forth in Regulation CC and that the Regulation
J warranties may not be disclaimed and are made regardless of whether
the sender's indorsement appears on the item.
One commenter was concerned that dropping the word ``materially''
would mean that repair of MICR encoding on a check that rejects from
automated processing would constitute an alteration. Section 3-407 of
the U.C.C. defines ``alteration'' as an unauthorized change that
purports to modify the obligation of a party or an unauthorized
addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party. The 1990 version of
the U.C.C. appears to use the terms ``alteration'' synonymously with
the former term ``material alteration'' (see Official Comment (1) to
U.C.C. 3-407). MICR repair, which is intended to facilitate check
collection and not to affect the obligations of the parties to a check,
is unlikely to be considered an alteration.
Sections 210.5(d) and 210.12(i)
The Board proposed to add new paragraph (d) to Sec. 210.5 and new
paragraph (i) to Sec. 210.12 to give a Reserve Bank a security interest
in a sender's or prior collecting or returning bank's assets held by
the Reserve Bank. The security interest would attach when a warranty is
breached or other obligation is incurred. The proposed provisions were
based on similar provisions in subpart B of Regulation J, which gives a
Reserve Bank a security interest in the assets of a sender of a payment
order to secure overdrafts and other obligations (Sec. 210.28(b) (3)
and (4)).
Two commenters were concerned that the proposal would give Reserve
Banks greater rights than private-sector banks to resolve warranty
breach issues. One of the commenters stated that the proposal appeared
to give Reserve Banks a complete self-remedy for breaches absent a
court order or agreement of the parties. The commenter noted that
security interests under Sec. 210.28 are designed to secure overdrafts,
which are easily determinable, as opposed to warranty breaches, which
are often a matter of dispute. The commenter requested that the
proposal be clarified to provide that security interests do not attach
and a Reserve Bank may not set off or realize upon collateral without a
judicial determination or agreement of the parties.
Section 9-501(5) of the U.C.C. provides that when a claim of a
secured party is reduced to judgment, the secured party's lien on
collateral relates back to the date the security interest was
perfected. Accordingly, the Board believes that a Reserve Bank's
security interest in the assets of a warranting bank should attach on
the date the warranty is breached (generally the date the Reserve Bank
handles the check in question) so that the Reserve Bank may take
actions to protect its collateral, if necessary, as discussed below.
The Monetary Control Act of 1980 (12 U.S.C. 248a) directed the
Board and the Reserve Banks to establish and set prices for services
with due consideration to ensuring an adequate level of services
nationwide. In keeping with this directive, the Board expects that
Reserve Banks will provide check collection services to financially
troubled banks that cannot obtain services elsewhere. If a troubled
bank fails, the Reserve Bank may be liable on warranty claims that it
cannot pass back to the failed bank. Accordingly, the Board believes
that it is appropriate to provide some protection to the Reserve Banks
from pending insolvencies. Thus, the Board has adopted the proposed
security interest provisions, with modifications.
The modifications to Secs. 229.5(d) and 229.12(i) clarify when a
default occurs. Specifically, a Reserve Bank's rights to take any
action under those sections will apply only: (1) If the Reserve Bank,
in its sole discretion, deems itself insecure and gives notice thereof
to the sender or (2) at the time the sender suspends payments and is
closed. The Board believes that requiring the Reserve Bank to advise a
bank of its concerns about the bank's solvency will prevent the routine
use of set-off or other actions on collateral by Reserve Banks. The
Board believes that private-sector banks often reserve the right under
security agreements to take steps, such as placing a hold on
collateral, to protect themselves in cases where the banks consider
themselves insecure.
Under the final rule, when a Reserve Bank receives notice of a
warranty claim based on alleged forged indorsement or alteration, it
would pass the notice back to the bank from which it received the
check. The Reserve Bank would not, however, unilaterally pass judgment
on such a claim. Rather, the Reserve Banks' uniform operating circulars
provide that they will process adjustments for these types of warranty
claims only with the agreement of the prior collecting bank. If such
agreement is not forthcoming, the Reserve Bank would wait to be sued on
the warranty claim and would tender defense of the suit to the prior
collecting bank under Secs. 210.5 (b) and (c) and 210.12 (e) and (f) of
Regulation J. Entries would be made or collateral disposed of only
after judgment as provided in those sections. The amendments to
Secs. 229.5(d) and 229.12(i), however, would not require a sender bank
to fail or a Reserve Bank to deem itself insecure before the Reserve
Bank could make credit or debit adjustments to reserve or clearing
accounts in accordance with adjustment procedures established in
Reserve Bank operating circulars.
Section 210.6(b)
The Board proposed to amend Sec. 210.6(b) to conform the Reserve
Bank warranties to the transfer and presentment warranties in U.C.C. 4-
207 and 4-208. (See discussion of Sec. 210.5(a).) The amendment
clarifies that the Reserve Banks make the warranties set out in
Sec. 229.34 of Regulation CC. The Board received no comments on this
section and has adopted the amendment as proposed.
Section 210.6(c)
Section 210.6(c) provides a 2-year statute of limitations for
claims against Reserve Banks for lack of good faith or failure to
exercise ordinary care under Regulation J. The Board proposed to amend
this section to clarify that the Regulation CC limitation period of one
year would apply to any claims against a Reserve Bank under Regulation
CC, such as breach of a warranty under Sec. 229.34 or lack of good
faith or failure to exercise ordinary care under Sec. 229.38. This
amendment clarifies that claims against Reserve Banks for Regulation CC
violations are subject to the same time limitations as those against
private-sector banks.
The Board received three comments on this section. Two commenters
believed that limitation period for breach of Regulation CC warranties
should be two years rather than one year. One of these commenters often
receives adjustment requests from the IRS one to two years after the
fact and does not wish to be precluded from pursuing such adjustments
with a Reserve Bank. This commenter suggested that the Regulation CC
limitation period be extended to 2 years. Another commenter noted that,
if the one year limitation period is adopted, it should run from the
date of the last entry for the check in question rather than from the
date the check first cleared.
The Board believes that the same limitation period should apply to
Reserve Banks and private-sector banks for Regulation CC violations. As
Regulation CC provides a one-year statute of limitations, the Board
does not believe Regulation J should lengthen this period for Reserve
Banks and has adopted the proposed amendment. The one-year period was
established in subpart C of Regulation CC to match the one-year
limitation period for subpart B (funds availability) violations, which
was set by statute. As provided in Regulation CC Sec. 229.38(g), an
action must be brought within one year after the date of the occurrence
of the violation involved.
Section 210.9(a)(5)
Section 210.9(a)(5) provides that paying banks must settle for
checks presented by Reserve Banks by ``autocharge'' (i.e. a debit to an
account at a Reserve Bank), cash, or other means agreed to by the
Reserve Bank. The Board proposed to amend this section to clarify that
a Reserve Bank may, in its discretion, elect to obtain settlement by
autocharging the account of the paying bank for the amount of a cash
letter. Virtually all Reserve Bank presentments are settled via
autocharge. This amendment would restate the autocharge provisions that
currently are set out in the Reserve Banks' uniform cash item operating
circular.
The Board also proposed to amend this section to provide that
paying banks that receive presentment from Reserve Banks may not set
off other claims against the amount of settlement owed to the Reserve
Bank. Paying banks may set off against private-sector presenting banks
under Sec. 229.34(c)(4) of Regulation CC. The Regulation CC set-off
provision was designed to protect paying banks under the same-day
settlement rule, which requires paying banks to accept presentment from
and settle with all presenting banks, some of which may be in poor
financial condition. If a paying bank overpays a cash letter in
reliance on a cash letter total or check encoding warranted by the
presenting bank, it could face the risk that the presenting bank would
be unable to settle for adjustments. Protection against insolvency risk
would not be necessary against a Reserve Bank. In addition, as banks
generally settle with Reserve Banks via autocharge, set-off against a
Reserve Bank would be impractical. Therefore, the Board does not
believe this amendment would have a direct and material adverse effect
on the ability of private-sector banks to compete effectively with
Reserve Banks.
The Board received no comments on this section and has adopted the
amendments as proposed.
Section 210.12(a)
Section 210.12(a) provides that a paying bank that has settled for
a check presented by a Reserve Bank may return the check in accordance
with Regulation CC, the U.C.C., and the Reserve Bank's operating
circular. The Board proposed to amend this section to clarify that the
paying bank may also return a check prior to settlement in accordance
with Sec. 210.9(a) of Regulation J and the Reserve Bank's operating
circular. This amendment would clarify that a paying bank would have
the same return rights under Regulation J as under Regulation CC and
the U.C.C. The Board received no comments on this section and has
adopted the amendment as proposed.
Section 210.12(c)
Section 210.12(c) sets out the warranties and agreements made by a
bank that sends a returned check to a Reserve Bank. The Board proposed
to amend this section to clarify that, in addition to the warranties
set forth in Sec. 229.34 of Regulation CC, the sender also makes any
applicable warranty under state law. For example, the amendment would
clarify that a depositary bank that settled for a returned check could
recover the amount paid plus expenses and lost interest from a prior
bank that breached a transfer warranty, in accordance with U.C.C. 4-
208(d). In addition, similar to the amendments to Sec. 210.5(a), the
proposed revisions to this paragraph would clarify that the Regulation
J warranties may not be disclaimed and are made regardless of whether
the sender's indorsement appears on the item. These amendments restate
provisions that are already applicable to private-sector banks under
Regulation CC and the U.C.C. The Board received no comments on this
section and has adopted the amendments as proposed.
Section 210.12(d)
The Board proposed to add a new paragraph (d) to Sec. 210.12 to
clarify that when a Reserve Bank transfers and receives settlement for
a returned check, it makes the warranties set out in Sec. 229.34 of
Regulation CC. In addition, the new paragraph would parallel revised
Sec. 210.6(b) (governing Reserve Bank warranties for cash items) by
providing a limitation of the Reserve Bank's liabilities, other than
those allowed for in Regulation J, to the Reserve Bank's own lack of
good faith or failure to exercise ordinary care. (The amendments
redesignate current Secs. 210.12(d) through (g) as Secs. 210.12(e)
through (h).) The Board received no comments on this section and has
adopted the amendments as proposed.
Section 210.12(e) (Formerly 210.12(d)) and Section 210.5(b)
The U.C.C. (3-119) and Regulation CC (Sec. 229.34(e)) provide that
a bank that receives a tender of defense may in turn tender defense to
a prior bank in the collection or return chain. Unless the prior bank
comes in and defends, it is bound by the determination of fact common
to the current litigation and any subsequent litigation.
Section 210.5(b) of Regulation J provides that, when a Reserve Bank
tenders defense to a sender as a result of a tender to it, the Reserve
Bank need not be a defendant in the suit in order to recover from the
sender any losses that it incurs because of the judgment, so long as
the judgment addresses the fact issue of breach of warranty. The Board
adopted this provision in 1986 in order to reduce litigation and
provide a more efficient way of handling forged indorsement cases (51
FR 21740, June 16, 1986). Due to an oversight, when the Board amended
Sec. 210.12 to provide a similar rule for returned checks, the language
did not match that of Sec. 210.5(b) and could have been interpreted to
apply only when a Reserve Bank is a defendant (53 FR 21983, June 13,
1988). The Board proposed to amend Sec. 210.12(e) to conform it to
Sec. 210.5(b). (The amendments redesignate current Sec. 210.12(d) as
Sec. 210.12(e) and add a new paragraph (d) as discussed above.) The
Board also proposed to correct a typographical error in Sec. 210.5(b).
The Board received no comments on this section and has adopted the
amendments as proposed.
Section 210.12(h) (Formerly 210.12(g))
This section provides that a depositary bank must settle for
returned checks received from a Reserve Bank in the same manner as it
settles for cash items presented by the Reserve Bank. The Board
proposed to amend this section to clarify that settlement for returned
checks also must be made by the same time as settlement for cash items,
as provided in Sec. 210.9(a). The Board received no comments on this
section and has adopted the amendment as proposed.
Section 210.13(a)
Section 210.13(a) authorizes a Reserve Bank that does not receive
payment for an item to charge back the account of the sender, paying
bank, or returning bank from which the item was received. The Board
proposed to amend this section to clarify that a Reserve Bank also may
charge the account of a prior collecting bank through which the item
was received. This amendment is consistent with Sec. 229.35(b) of
Regulation CC, which allows a bank that handles a check or returned
check to recover from any prior indorser in the event that the bank
does not receive payment for the check from a subsequent bank in the
collection or return chain. In the event of such a recovery by a
Reserve Bank, Sec. 229.13(a) provides that no bank or person in the
forward collection or return chain would have an interest in any funds
in the Reserve Bank's possession of the bank that failed to pay. The
amendment would clarify that, when a Reserve Bank charges back an item,
this limitation of interest applies only when a bank or person seeks
payment of the amount of the item out of funds or property held by the
Reserve Bank. The Board received no comments on this section and has
adopted the amendment as proposed.
Section 210.13(b)
Section 210.13(b) provides that a Reserve Bank will not debit an
institution's reserve account for drafts or other orders on the account
after receiving notice that the institution has been closed. The Board
proposed to amend this section to clarify that Reserve Banks will not
charge an account as authorized by Sec. 210.9(a)(5) after receiving
notice the institution is closed. The amendment also would clarify that
this section applies only to charges to reserve accounts to settle for
items (including returned checks) and does not affect the Reserve
Bank's security interest under proposed Secs. 210.5(d) and 210.12(i).
The Board received no comments on this section and has adopted the
amendments as proposed.
Section 210.14
Section 210.14 describes those circumstances under which the time
limits for acting on an item may be extended, such as interruption of
communication facilities, suspension of payments by a bank, and other
emergency conditions. The Board proposed to amend this section to
clarify that computer and equipment failure would constitute emergency
conditions. This amendment is consistent with the emergency provisions
in Sec. 229.38(e) of Regulation CC and U.C.C. 4-109(b). The Board
received no comments on this section and has adopted the amendment as
proposed.
Final Regulatory Flexibility Analysis
Two of the three requirements of a final regulatory flexibility
analysis (5 U.S.C. 604), (1) a succinct statement of the need for and
the objectives of the rule and (2) a summary of the issues raised by
the public comments, the agency's assessment of the issues, and a
statement of the changes made in the final rule in response to the
comments, are discussed above. The third requirement of a final
regulatory flexibility analysis is a description of significant
alternatives to the rule that would minimize the rule's economic impact
on small entities and reasons why the alternatives were rejected. The
amendments apply to all depository institutions that receive items from
or send items to Federal Reserve Banks, regardless of size. The
amendments generally clarify rights and duties of banks and do not
impose any substantial economic burden on small entities.
List of Subjects in 12 CFR Part 210
Banks, Banking, Check collection.
For the reasons set out in the preamble, 12 CFR part 210 is amended
as follows:
PART 210--COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE
BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)
1. The authority citation for part 210 is revised to read as
follows:
Authority: 12 U.S.C. 248 (i), (j), and (o), 342, 360, 464, and
4001-4010.
2. The first sentence of Sec. 210.1 is revised to read as follows:
Sec. 210.1 Authority, purpose, and scope.
The Board of Governors of the Federal Reserve System (Board) has
issued this subpart pursuant to the Federal Reserve Act, sections 11
(i) and (j) (12 U.S.C. 248 (i) and (j)), section 13 (12 U.S.C. 342),
section 16 (12 U.S.C. 248(o) and 360), and section 19(f) (12 U.S.C.
464); the Expedited Funds Availability Act (12 U.S.C. 4001 et seq.);
and other laws. * * *
3. In Sec. 210.2, paragraph (g) introductory text is revised and a
new paragraph (p) is added immediately before the concluding text to
read as follows:
Sec. 210.2 Definitions.
* * * * *
(g) Item means an instrument or a promise or order to pay money,
whether negotiable or not, that is:
* * * * *
(p) Uniform Commercial Code means the Uniform Commercial Code as
adopted in a state.
* * * * *
4. In Sec. 210.3, the last sentence of paragraph (a) is revised and
a new paragraph (f) is added to read as follows:
Sec. 210.3 General provisions.
(a) * * * The circulars may, among other things, classify cash
items and noncash items, require separate sorts and letters, provide
different closing times for the receipt of different classes or types
of items, set forth terms of services, and establish procedures for
adjustments on a Reserve Bank's books, including amounts, waiver of
expenses, and payment of interest by as-of adjustment.
* * * * *
(f) Relation to other law. The provisions of this subpart supersede
any inconsistent provisions of the Uniform Commercial Code, of any
other state law, or of part 229 of this title, but only to the extent
of the inconsistency.
5. In Sec. 210.5, paragraph (a) introductory text and paragraph
(a)(2) are revised, in paragraph (b)(3) the phrase ``judgment or decree
of the tender of defense'' is revised to read ``judgment or decree or
the tender of defense'', and a new paragraph (d) is added to read as
follows:
Sec. 210.5 Sender's agreement; recovery by Reserve Bank.
(a) Sender's agreement. The warranties, authorizations, and
agreements made pursuant to this paragraph may not be disclaimed and
are made whether or not the item bears an indorsement of the sender. By
sending an item to a Reserve Bank, the sender:
* * * * *
(2) Warrants to each Reserve Bank handling the item that:
(i) The sender is a person entitled to enforce the item or
authorized to obtain payment of the item on behalf of a person entitled
to enforce the item; and
(ii) The item has not been altered; but this paragraph (a)(2) does
not limit any warranty by a sender or other prior party arising under
state law or under subpart C of part 229 of this title; and
* * * * *
(d) Security interest. To secure any obligation due or to become
due to a Reserve Bank by a sender or prior collecting bank under this
subpart or subpart C of part 229 of this title, the sender and prior
collecting bank, by sending an item directly or indirectly to the
Reserve Bank, grant to the Reserve Bank a security interest in all of
the sender's or prior collecting bank's assets in the possession of, or
held for the account of, the Reserve Bank. The security interest
attaches when a warranty is breached or any other obligation to the
Reserve Bank is incurred. If the Reserve Bank, in its sole discretion,
deems itself insecure and gives notice thereof to the sender or prior
collecting bank, or if the sender or prior collecting bank suspends
payments or is closed, the Reserve Bank may take any action authorized
by law to recover the amount of an obligation, including, but not
limited to, the exercise of rights of set off, the realization on any
available collateral, and any other rights it may have as a creditor
under applicable law.
6. In Sec. 210.6, paragraphs (b)(1) and (b)(2) are revised, a new
first sentence is added to paragraph (b) concluding text, and a new
last sentence is added to paragraph (c) to read as follows:
Sec. 210.6 Status, warranties, and liability of Reserve Bank.
* * * * *
(b) * * *
(1) That the Reserve Bank is a person entitled to enforce the item
(or is authorized to obtain payment of the item on behalf of a person
who is either:
(i) Entitled to enforce the item; or
(ii) Authorized to obtain payment on behalf of a person entitled to
enforce the item); and
(2) That the item has not been altered.
The Reserve Bank also makes the warranties set forth in Sec. 229.34(c)
of this title, subject to the terms of part 229 of this title. * * *
(c) * * * This paragraph does not lengthen the time limit for
claims under Sec. 229.38(g) of this title (which include claims for
breach of warranty under Sec. 229.34 of this title).
7. In Sec. 210.9, paragraph (a)(5) is revised to read as follows:
Sec. 210.9 Settlement and payment.
(a) * * *
(5) Settlement with a Reserve Bank under paragraphs (a)(1) through
(4) of this section shall be made by debit to an account on the Reserve
Bank's books, cash, or other form of settlement to which the Reserve
Bank agrees, except that the Reserve Bank may, in its discretion,
obtain settlement by charging the paying bank's reserve or clearing
account. A paying bank may not set off against the amount of a
settlement under this section the amount of a claim with respect to
another cash item, cash letter, or other claim under Sec. 229.34(c) of
this title or other law.
* * * * *
8. In Sec. 210.12, a new sentence is added after the first sentence
of paragraph (a), paragraph (c) introductory text and paragraph (c)(2)
are revised, paragraphs (d) through (g) are redesignated as paragraphs
(e) through (h), respectively, new paragraphs (d) and (i) are added,
and newly-designated paragraph (e) concluding text and newly-designated
paragraph (h) are revised to read as follows:
Sec. 210.12 Return of cash items and handling of returned checks.
(a) * * * A paying bank that receives a cash item directly or
indirectly from a Reserve Bank also may return the item prior to
settlement, in accordance with Sec. 210.9(a) and its Reserve Bank's
operating circular. * * *
* * * * *
(c) Paying bank's and returning bank's agreement. The warranties,
authorizations, and agreements made pursuant to this paragraph may not
be disclaimed and are made whether or not the returned check bears an
indorsement of the paying bank or returning bank. By sending a returned
check to a Reserve Bank, the paying bank or returning bank--
* * * * *
(2) Makes the warranties set forth in Sec. 229.34 of this title
(but this paragraph does not limit any warranty by a paying or
returning bank arising under state law); and
* * * * *
(d) Warranties by Reserve Bank. By sending a returned check and
receiving settlement or other consideration for it, a Reserve Bank
makes the returning bank warranties as set forth in Sec. 229.34 of this
title, subject to the terms of part 229 of this title. The Reserve Bank
shall not have or assume any other liability to the transferee
returning bank, to any subsequent returning bank, to the depository
bank, to the owner of the check, or to any other person, except for the
Reserve Bank's own lack of good faith or failure to exercise ordinary
care as provided in subpart C of part 229 of this title.
(e) * * *
The Reserve Bank may, upon the entry of a final judgment or decree,
recover from the paying bank or returning bank the amount of attorneys'
fees and other expenses of litigation incurred, as well as any amount
the Reserve Bank is required to pay because of the judgment or decree
or the tender of defense, together with interest thereon.
* * * * *
(h) Settlement. A subsequent returning bank or depositary bank
shall settle for returned checks in the same manner and by the same
time as for cash items presented for payment under this subpart.
(i) Security interest. To secure any obligation due or to become
due to a Reserve Bank by a paying bank, returning bank, or prior
returning bank under this subpart or subpart C of part 229 of this
title, the paying bank, returning bank, and prior returning bank, by
sending a returned check directly or indirectly to the Reserve Bank,
grant to the Reserve Bank a security interest in all of the paying
bank's, returning bank's, and prior returning bank's assets in the
possession of, or held for the account of, the Reserve Bank. The
security interest attaches when a warranty is breached or any other
obligation to the Reserve Bank is incurred. If the Reserve Bank, in its
sole discretion, deems itself insecure and gives notice thereof to the
paying bank, returning bank, or prior returning bank, or if the paying
bank, returning bank, or prior returning bank suspends payments or is
closed, the Reserve Bank may take any action authorized by law to
recover the amount of an obligation, including, but not limited to, the
exercise of rights of set off, the realization on any available
collateral, and any other rights it may have as a creditor under
applicable law.
9. Section 210.13 is revised to read as follows:
Sec. 210.13 Unpaid items.
(a) Right of recovery. If a Reserve Bank does not receive payment
in actually and finally collected funds for an item, the Reserve Bank
shall recover by charge-back or otherwise the amount of the item from
the sender, prior collecting bank, paying bank, or returning bank from
or through which it was received, whether or not the item itself can be
sent back. In the event of recovery from such a party, no party,
including the owner or holder of the item, shall, for the purpose of
obtaining payment of the amount of the item, have any interest in any
reserve balance or other funds or property in the Reserve Bank's
possession of the bank that failed to make payment in actually and
finally collected funds.
(b) Suspension or closing of bank. A Reserve Bank shall not pay or
act on a draft, authorization to charge (including a charge authorized
by Sec. 210.9(a)(5)), or other order on a reserve balance or other
funds in its possession for the purpose of settling for items under
Sec. 210.9 or Sec. 210.12 after it receives notice of suspension or
closing of the bank making the settlement for that bank's own or
another's account.
10. Section 210.14 is revised to read as follows:
Sec. 210.14 Extension of time limits.
If a bank (including a Reserve Bank) or nonbank payor is delayed in
acting on an item beyond applicable time limits because of interruption
of communication or computer facilities, suspension of payments by a
bank or nonbank payor, war, emergency conditions, failure of equipment,
or other circumstances beyond its control, its time for acting is
extended for the time necessary to complete the action, if it exercises
such diligence as the circumstances require.
By order of the Board of Governors of the Federal Reserve
System, April 28, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-10645 Filed 5-3-94; 8:45 am]
BILLING CODE 6210-01-P
