5. The content of the notice of nonpayment will change to require
only the following:
• Name of the payee(s);
• Date of the endorsement of the depositary bank;
• The bank name, routing number, and trace or sequence
number associated with the endorsement of the depositary
• Reason for nonpayment.
6. The regulation contains a new incentive for banks to process
returned items electronically. The incentive is that the depositary bank can hold the paying bank (or a returning bank)
liable for an untimely return (not “expeditious”) of a check/
item only if the return was received electronically.
Electronic Check Collection and Return
Currently, Subpart C of Regulation CC applies only to paper checks.
This means that the current provisions of Subpart C related to
acceptance of returned checks, presentment, and warranties do
not apply to electronic images of checks (“electronic images”) or
to electronic information derived from checks (“electronic information”). The collection and return of electronic images and
electronic information are governed by agreements between the
banks, not by Regulation CC.
However, effective July 1, 2018, this changes. Regulation CC
includes indemnities for electronically-created items, which are
defined as “an electronic image that has all the attributes of an
electronic check or electronic returned check but was created
electronically and not from a paper check” (i.e., an electronic
payment order). The indemnities for electronically-created items
are for losses resulting from:
1. The electronically-created item not being authorized by the
account holder; or
2. A subsequent bank paying an item that has already been paid.
In addition, a bank transferring an image or an electronically-created item indemnifies each subsequent bank in the collection
or return process against any loss, claim, or damage that results
from the fact that the image or information was not derived from
a paper check.
Additional warranties now apply to electronic checks and
electronic returned checks:
1. Returned-check warranties;
2. Notice of nonpayment warranties;
3. Settlement amount, encoding, and offset warranties;
4. Transfer and presentment warranties related to a remotely-created check;
5. Banks will not be asked to pay an item twice; and
6. Electronic images and electronic information are sufficient
to create a substitute check.
These warranties ensure that a bank that receives a check for
collection, presentment, or return receives the same warranties
regardless of whether the check is in paper or electronic form.
Regulation CC also provides for another new indemnity. A
depositary bank that receives a deposit of an original paper check is
indemnified against loss—if the check is returned unpaid because
the check was previously deposited through a remote deposit
capture service and paid. If there is a restrictive endorsement,
such as “for mobile deposit only,” there is no indemnification to
the bank holding the original paper check.
Since there are only a few months until the changes to Regulation CC become effective, here are some actions to consider:
■ ■ ■ Update your Regulation CC procedures. There is no impact to
your procedures relating to check holds, but your back office
procedures relating to check processing and liability will be
affected. Be sure to include the new warranties/indemnifica-tions in your procedures.
■ ■ ■ Consider requiring restrictive endorsements (i.e., “for mobile
deposit only”) on checks deposited through remote deposit
capture. And if you do, ensure that the use of restrictive endorsements is addressed in your account agreement. Without the
restrictive endorsement, you may have liability to an institution
holding the original paper check.
■ ■ ■ Regulation CC (§229.14) requires institutions to begin paying
interest no later than the business day on which the bank receives
credit for the funds. If your financial institution follows this
practice, review your calculated availability schedule you use
to pay interest to ensure it is consistent with when you actually receive funds. For example, if you rely on the calculated
availability schedule from the Federal Reserve, but process a
class of checks via image exchange, ensure your calculated
availability schedule is updated accordingly. You also want to
be sure that you are using the most current version of the
calculated availability schedule.
■ ■ ■ Update your training. The training for your front line relating
to check holds and funds availability most likely won’t need
to be updated, but your back office training will need to be
updated. And don’t forget to review your online training from
third-party vendors to ensure that it is current as well.
■ ■ ■ Notice of nonpayment. Be sure the timing required by the
regulation is correct in both your training and procedures.
■ ■ ■ System changes/change control. Are there any system changes
required? Consider the system that generates your notice of
nonpayment and the new timing requirements. Does your re-
mote deposit capture system provide a restrictive endorsement?
■ ■ ■ Third-party vendor agreements. Do any of your agreements
with third parties relating to check/item/image processing
need to be updated as a result of the changes in warranties
and indemnifications? ■
ABOUT THE AUTHOR
DAVID MCCREA, CRCM, is a Director with Treliant and is an
experienced executive with a background in compliance, Bank
Secrecy Act/Anti-Money Laundering (BSA/AML), operations, vendor
management, security, and fraud/loss control at banks, thrifts, and
a core banking software company. He currently serves as a Faculty
Member of the American Bankers Association’s (ABA) Compliance
School, is an instructor for an Executive Development Program
provided to several state banking associations, and is a frequent
speaker for state banking associations. He can be reached at