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November/December 2017 Issue: Front Page > Operations

Recent Amendments to Regulation CC;

Everything You Need to Know, But Were Afraid To Ask

Attention this has changed! stamp Also known as the “Expedited Funds Availability Act”, Regulation CC, is a United States law enacted by Congress in 1987. It is the regulation governing the availability of funds for transaction accounts and the “holds” which financial institutions can place on checks. This regulation continues to be one of the toughest compliance problems for financial institutions around the country.

On June 15, 2017, the Federal Reserve Board published its long-awaited final amendments to Reg CC. The 232-page rule will become effective July 1st, 2018 and updates the check collection and return provisions to reflect the evolution from a paper-based system to the electronic check collection system prevalent today. In addition, the FRB has also proposed new language to amend current liability provisions for electronic checks.

The amendments contain a number of changes that will impact financial institutions such as modifications to check return requirements, additional warranties, and new indemnities including a new indemnity for Remote Deposit Capture (RDC).

So, what are the important changes to Reg CC and how will they impact your credit union? The highlights include:

  • Reg CC to Cover Electronic Checks – “images” of original paper checks are now included in Reg CC and will be treated the same as original “paper” checks.

  • Indemnity for Duplicate Payments From Remote Deposit Capture (RDC) – this new indemnity provision protects a Bank of First Deposit (BOFD) that receives as unpaid a paper check deposit after the check was previously deposited by RDC at another bank. Under this provision, the BOFD accepting the original paper check is able to recover a loss from the depository bank receiving the item through RDC.  The exception for this is if the RDC deposit has a restrictive indorsement.

  • Expeditious Return Requirement – under the new amendments to Reg CC, updates were made to the expeditious returns requirement (for deposits) or “two-day test”. Currently, the requirement is 4PM on the 2nd business day after the item is presented. The new time is now 2PM. This applies to both paper and electronic checks. Note: If VolCorp is currently processing your check returns, your “cut-off” time will not change. In addition, there is also a protection from liability for the paying bank if the BOFD does not return the check by “commercially reasonable means”.

  • Notification of Non-Payment – this new change applies to both paper and electronic checks. The notification time that a “payor bank” has to return the item and notify the BOFD with a Large Dollar Return Notice (LDRN) has changed. Previously, the time for receipt was 4PM and the threshold was $2500. Under the new rule, the “payor bank” that returns an item in the amount of $5000 or more must now provide the BOFD with a LDRN no later than 2PM on the 2nd business day following the banking day on which the item was presented to the payor bank. Note: If VolCorp is currently processing your check returns, your “cut-off” time will not change. If the “payor bank” returns a check, it also must follow the rules for “Notice in Lieu” (NIL) if it cannot provide the original check (OC), the substitute check (SC) or the electronic return check (ERC).

  • New Indemnities for Electronically Created Items (ECI) – ECIs are “check-like” items created in an electronic form (but never existed in paper form). ECIs are not electronic checks as currently defined by Reg CC and therefore not subject to other provisions of Reg CC. However, the new indemnity does cover losses from ECIs as it was never a paper check. Additionally, indemnification exists for an ECI that was unauthorized as well as for a bank that pays a previously paid ECI.

  • Substitute Check for ATM Deposits – when a BOFD rejects a deposit submitted from an ATM and returns a substitute check back, the BOFD warrants and indemnifies the check under the new Reg CC.

Things to Consider:

  • Financial institutions should start planning for these changes now as some of the changes will require coordination with third party vendors.

  • Steps should be taken to address the new RDC indemnity as the Reg CC change creates a new form of risk. If you offer RDC services, (at a minimum) update your RDC endorsement requirements.

  • Review your check/image processing agreements. Now is a good time to update all of them to conform to the new vocabulary and new rules.

  • Educate your staff – the new returned check deadline has changed from 4:00pm to 2:00pm and the “large dollar notification” has been increased from $2500 to $5000.

The check collection process is no longer a paper-based system, but rather an imaged-check collection process. The changes to Reg CC recognize this and provide clarity for an electronic image-based check collection and returns environment. The new Reg CC amendments both expedite and provide additional protections that didn’t exist before. These changes are an important step in bringing regulations up-to-date with current industry practices.

Should you have any questions regarding the Reg CC Amendments, please contact Jenifer Smith at jsmith@volcorp.org.

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