2011-23896. Indorsement and Payment of Checks Drawn on the United States Treasury

AGENCY:

Financial Management Service, Fiscal Service, Treasury.

ACTION:

Final rule.

SUMMARY:

This final rule authorizes the Department of the Treasury (Treasury), Financial Management Service (FMS), to direct Federal Reserve Banks to debit a financial institution's Master Account for all check reclamations against the financial institution that the financial institution has not protested. Financial institutions will continue to have the right to file a protest with FMS if they believe a proposed reclamation is in error.

DATES:

This rule is effective October 19, 2011.

FOR FURTHER INFORMATION CONTACT:

Sandra Walls, Reclamation Branch Manager, Check Resolution Division, at [phone] or [e-mail]; or William J. Erle, Senior Counsel, at [phone] or [e-mail].

SUPPLEMENTARY INFORMATION:

I. Background

The Department of the Treasury (Treasury), Financial Management Service (FMS),^[1] is amending its regulation at 31 CFR part 240 (Part 240), governing the indorsement and payment of checks drawn on the United States Treasury. Part 240 sets forth how checks may be indorsed and the remedies available to Treasury when checks are improperly negotiated. The rule provides for the allocation of loss between the Government and indorsers of the check. In addition, Part 240 provides information on how Treasury will collect debts owed by financial institutions and other indorsers when they fail to pay check reclamations made by Treasury.

On January 4, 2010, Treasury issued a notice of proposed rulemaking (NPRM) requesting comments on its proposal to provide Treasury with the authority to direct Federal Reserve Banks to debit a financial institution's Master Account for all check reclamations for which the financial institution has not submitted a valid protest with supporting documentation. See 75 FR 95. The proposed rule explained that FMS will notify the financial institution of the reclamation by sending a NOTICE OF DIRECT DEBIT (RECLAMATION), which also will inform the financial institution that, if the reclamation is not paid by the 30th day after the direct debit notice date, the financial institution's Master Account will be debited by its servicing Federal Reserve Bank.

II. Discussion of Comments

FMS received two comments on the proposed rule—one from a financial institution and one from a banking association. Both commenters indicated that the proposed 30-day notice period before a direct debit is carried out was too short. Rather, they suggested that FMS provide a financial institution with notice 60 days before directing the Federal Reserve to debit the financial institution's Master Account. FMS carefully considered this comment and decided to keep the proposed 30-day notice period. Currently 95% of all Treasury reclamations are already paid by financial institutions within 30 days. An extended processing time would not be consistent with the goal of the revised regulation—to expedite and streamline the process of collecting unpaid reclamations. When a financial institution has reason to believe the reclamation direct debit should not proceed, it may file a protest.

Both commenters indicated that FMS should clarify which account will be debited in a reclamation direct debit. They pointed out that the NPRM refers to both an “account” and a “reserve account.” FMS agrees that this point should be clarified. Therefore, the final rule includes a new definition for “Master Account” that mirrors the definition found in Federal Reserve Banks Operating Circular 1. Additionally, throughout the rule, “reserve account” and “account” have been replaced with “Master Account.”

Although not a direct comment on the proposed rule, both commenters expressed concern with the amount of time FMS takes to process reclamation protests. In response to this concern, FMS notes that it routinely exceeds the goal set forth in Part 240: that FMS will make every effort to decide a properly submitted protest within 60 days. In fiscal year 2010, 85% of bank protests received were resolved within 30 days. Still, some complicated protests take longer to resolve. FMS will continue to work diligently to make final decisions as quickly as possible. Contrary to one commenter's assertion, FMS maintains a reclamations Web page (http://www.fms.treas.gov/​goldbook) that provides a telephone number, a facsimile number, an e-mail address, and a mailing address for financial institutions to use to get information about their protests.

Finally, one commenter asked FMS to include in the final rule requirements for refund transaction processing. The commenter was concerned that, in the event FMS provides a refund for a reclamation payment, the refund may include interest and penalties already paid by the financial institution in addition to the original reclamation debt. To maintain accurate accounting for refund transactions, the commenter asked FMS to provide more information about the refund amount and to include the requirements for refund transaction processing in the final rule. Currently, on the check issued in settlement for a bank protest, FMS prints “refund for check #XXXX-XX,XXX,XXX” to aid the financial institution in cross-referencing against their reclamation records. After direct debiting has been instituted, FMS will begin to make changes to its systems to allow electronic refunds via credit to the financial institution's Master Account. FMS believes that more information about the refund amount is not necessary because normally, penalties, administrative fees, and interest will not be assessed since the debit will occur on the 31st day after the reclamation date.

III. Clarifications and Technical Corrections

FMS is amending § 240.9(b)(3)(ii) to clarify that Treasury must receive a reclamation protest within 60 days after the reclamation date. The NPRM specified that if a financial institution files a reclamation protest within 30 days after the reclamation date, Treasury would not instruct the Federal Reserve Bank to debit the financial institution's Master Account. See § 240.9(a)(1)(iii). The preamble to the NPRM specified that a financial institution has an additional 30 days after the direct debit date to submit a reclamation protest. To provide for a 30-day period before direct debit and a 30-day period after direct debit, § 240.9(b)(3)(ii) is amended to specify a total of 60 days after the reclamation date.

Throughout the rule, the term “Director, Financial Processing Division,” is replaced with “responsible FMS Director.” This change allows the rule to remain accurate should re-organizations occur.

Sections 240.9(a)(2) and 240.9(b)(3) are revised to update the mailing address for submitting a request to inspect Treasury records, to submit a repayment agreement, or to submit a reclamation protest. The rule is revised to provide addresses through the Check Claims Web site or the Goldbook: The Check Reclamation Guide.

Sections 240.9(a)(1)(i) and (iii), and 240.9(b)(4)(iii) are revised to replace the words “of” and “from” with the word “after,” to make it clear that a financial institution has 30 days after the reclamation date to pay the reclamation debt or file a protest before Treasury instructs the Federal Reserve Bank to debit the financial institution's Master Account. Therefore, the debit will occur on the 31st day after the reclamation date.

This Final Rule also corrects the NPRM by spelling the word “indorsement” with an “i” wherever it appears.

IV. Procedural Analyses

Regulatory Planning and Review

The final rule does not meet the criteria for a “significant regulatory action” as defined in Executive Order 12866. Therefore, the regulatory review procedures contained therein do not apply.

Regulatory Flexibility Act Analysis

It is hereby certified that the rule will not have a significant economic impact on a substantial number of small entities. This rule would eliminate certain administrative fees and interest and penalty charges in order to streamline and automate reclamation procedures. The changes to the regulation related to automating reclamations should have a minimal economic impact on small financial institutions and in fact, may reduce some costs for financial institutions affected by the changes. Accordingly, a regulatory flexibility analysis under the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) is not required.

List of Subjects in 31 CFR Part 240

• Banks
• Banking
• Checks
• Counterfeit checks
• Federal Reserve system
• Forgery, and Guarantees

For the reasons set forth in the preamble, we are amending 31 CFR part 240 as follows:

PART 240—INDORSEMENT AND PAYMENT OF CHECKS DRAWN ON THE UNITED STATES TREASURY

1. The authority citation for part 240 continues to read as follows:

Authority: 5 U.S.C. 301; 12 U.S.C. 391; 31 U.S.C. 321, 3327, 3328, 3331, 3334, 3343, 3711, 3712, 3716, 3717; 332 U.S. 234 (1947); 318 U.S. 363 (1943).

2. In part 240 revise all references to “the Director, Financial Processing Division” and “the Director of the Financial Processing Division” wherever they appear to read “the responsible FMS Director”.

3. In § 240.1, add paragraph (d) to read as follows:

§ 240.1

Scope of regulations.

* * * * *

(d) A financial institution's indorsement or presentment of a U.S. Treasury check shall constitute its agreement to this part. The financial institution hereby authorizes its servicing Federal Reserve Bank to debit the financial institution's Federal Reserve Master Account for the amount of the reclamation and any accrued interest, penalties and/or administrative costs in accordance with the provisions of § 240.9.

4. In § 240.2, redesignate paragraphs (t) through (mm) as (u) through (nn), and add new paragraph (t) to read as follows:

§ 240.2

Definitions.

* * * * *

(t) Master Account means the record of financial rights and obligations of an account holder and the Federal Reserve Bank with respect to each other, where opening, intraday, and closing balances are determined.

* * * * *

5. In § 240.9, revise paragraphs (a), (b)(3) introductory text, (b)(3)(ii), and (b)(4)(iii) to read as follows:

§ 240.9

Reclamation procedures; reclamation protests.

(a) Reclamation procedures. (1) Treasury will send a “NOTICE OF DIRECT DEBIT (RECLAMATION)” to the reclamation debtor in accordance with § 240.8(a). This notice will advise the reclamation debtor of the amount demanded and the reason for the demand. Treasury will provide notice to the reclamation debtor that:

(i) If the reclamation debt is not paid within 30 days after the reclamation date, Treasury intends to collect the amount outstanding by instructing the appropriate Federal Reserve Bank to debit on the 31st day the Master Account used by the reclamation debtor. The Federal Reserve Bank will provide advice of the debit to the reclamation debtor;

(ii) The reclamation debtor has an opportunity to inspect and copy Treasury's records with respect to the reclamation debt;

(iii) The reclamation debtor may, by filing a protest in accordance with § 240.9(b), request Treasury to review its decision that the reclamation debtor is liable for the reclamation debt. If such a protest is filed within 30 days after the reclamation date, Treasury will not instruct the appropriate Federal Reserve Bank to debit the Master Account used by the reclamation debtor while the protest is still pending; and

(iv) The reclamation debtor has an opportunity to enter into a written agreement with Treasury for the repayment of the reclamation debt. A request for a repayment agreement must be accompanied by documentary proof that satisfies Treasury that the reclamation debtor is unable to repay the entire amount owed when due.

(2) Requests by a reclamation debtor for an appointment to inspect and copy Treasury's records with respect to a reclamation debt and requests to enter into repayment agreements must be sent in writing to the address provided on the Check Claims Web site at http://www.fms.treas.gov/​checkclaims or to such other address as Treasury may publish in the Goldbook: The Check Reclamation Guide, which can be found at http://www.fms.treas.gov.

(3) If Treasury determines a reclamation debt is due and the Federal Reserve Bank is unable to debit the financial institution's Master Account, FMS will assess interest, penalties, and administrative costs in accordance with § 240.8. Additionally, Treasury will proceed to collect the reclamation debt through offset in accordance with § 240.10 and Treasury Check Offset in accordance with § 240.11.

(4) If Treasury determines a reclamation has been made in error, Treasury will abandon the reclamation. If Treasury already has collected the amount of the reclamation from the reclamation debtor, Treasury will promptly refund to the reclamation debtor the amount of its payment.

(b) * * *

(3) Procedures for filing a protest. A reclamation protest must be sent in writing to the address provided on the Check Claims Web site at http://www.fms.treas.gov/​checkclaims or to such other address as Treasury may publish in the Goldbook: The Check Reclamation Guide, which can be found at http://www.fms.treas.gov.

* * * * *

(ii) Treasury will not consider reclamation protests received more than 60 days after the reclamation date.

* * * * *

(4) * * *

(iii) If the responsible FMS Director, or an authorized designee, finds, by a preponderance of the evidence, the reclamation debtor is liable for the reclamation debt, Treasury will notify the reclamation debtor of his or her decision in writing. If the reclamation debtor has not paid the reclamation in full, Treasury will direct the Federal Reserve Bank to debit the financial institution's Master Account immediately, provided at least 30 days have passed after the date of the NOTICE OF DIRECT DEBIT (RECLAMATION). If at least 30 days have not yet passed after the date of the NOTICE OF DIRECT DEBIT (RECLAMATION), Treasury will direct the Federal Reserve Bank to debit the financial institution's Master Account on the 31st day after the date of the NOTICE OF DIRECT DEBIT (RECLAMATION). The Federal Reserve Bank will provide advice of the debit to the reclamation debtor. If the appropriate Federal Reserve Bank is unable to debit a reclamation debtor's Master Account, Treasury will proceed to collect the reclamation debt through offset in accordance with § 240.10 and § 240.11.

* * * * *

Dated: September 12, 2011.

Richard L. Gregg,

Fiscal Assistant Secretary.

Footnotes

1.  FMS is the bureau within Treasury charged with implementing Treasury's authority in this area. The terms Treasury and FMS are used interchangeably in this rule.