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May/June 2018 Issue: Front Page > Industry Info

Industry Info
RDC Indemnity Provision
ATTENTION This Has Changed! In 1992, Billy Ray Cyrus sang about his "Achy Breaky Heart." A gallon of gas cost $1.05. The average price of a new house was $122,500. And Regulation CC became law. Quite a bit has changed over the pasts 26 years, but Reg CC really hasn't. Think about it - how much has banking advanced during that time, particularly in light of the use of electronic items and checks?

Most of Reg CC still applies only to paper checks. But the law is now getting a contemporary transformation to recognize the fact that most of the current check collection realm is electronic.

The new amendments to Reg CC, effective July 1, 2018, look to modernize existing check collection practices. The law now creates a new remote deposit capture (RDC) indemnity that will increase risk to credit unions that offer RDC service. The RDC indemnity [229.24(f)] is designed to protect a depositary institution that accepts an original paper check for deposit which is returned unpaid to that institution due to being previously deposited at another institution via RDC. However, the RDC indemnity does not apply if the original paper check contains a restrictive endorsement, such as "for mobile deposit only."

The amount of the protection shall not exceed the sum of (a) the amount of the loss of the indemnified institution, up to the amount of the check, and (b) interest and expenses of the indemnified institution (including costs and reasonable attorney's fees).

Keep in mind that losses stemming from RDC indemnity claims against credit unions would generally not be insurable. Because of this, it is crucial for credit unions to not only require members to restrictively endorse original paper checks before the images are transmitted for deposit, but also to enforce this requirement.

The Federal Reserve Board has yet to provide any direction on how depositary institutions can pursue an RDC claim, nor did it address how an indemnified institution can identify the institution that accepted the check via RDC. Items that are returned as unpaid do not bear any markings to allow depositary institutions to determine the identity of the depositary institution that accepted the check via RDC.

In order to help mitigate loss in this area, credit unions should consider these measures:

  1. Perform member due diligence to qualify them for RDC service.
  2. Be sure that your RDC agreement/disclosure requires that your members use the following restrictive endorsement verbiage before submitting their original paper checks for deposit:
    • For Mobile Deposit Only
    • Credit Union Name
    • Account Number
    • Member’s Signature
  3. To prevent losses from RDC indemnity claims, credit unions need to enforce the restrictive endorsement requirement. Consider the following:
    • Let your members know that you will be enforcing the restrictive endorsement requirement and that you will decline checks that lack the restrictive endorsement.
    • Manually review check images transmitted for deposit and decline items that lack the proper restrictive endorsement. If you normally have a large volume of RDC items on a daily basis and allow checks to go through RDC automatically, select a sample of images to review. A good practice would be to manually review images submitted by new RDC users for the first 2-3 months. Monetary thresholds could also be set.

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