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6500 - Consumer Protection
C. 229.30(c) Extension of Deadline
1. This paragraph permits extension of the deadlines for returning
a check for which the paying bank previously has settled (generally
midnight of the banking day following the banking day on which the
check is received by the paying bank) and for returning a check without
settling for it (generally midnight of the banking day on which the
check is received by the paying bank, or such other time provided by
§ 210.9 of Regulation J (12
{{8-31-04 p.7418.82}}CFR part 210) or
§ 229.36(f)(2) of this part), but not of the duty of expeditious
return, in two circumstances:
a. A paying bank may have a courier that leaves after midnight (or
after any other applicable deadline) to deliver its forward-collection
checks. This paragraph removes the constraint of the midnight deadline
for returned checks if the returned check reaches the receiving bank on
or before the receiving bank's next banking day following the
otherwise applicable deadline by the earlier of the close of that
banking day or a cutoff hour of 2 p.m. or later set by the receiving
bank under U.C.C. 4--108. The extension also applies if the check
reaches the bank to which it is sent later than the time described in
the previous sentence if highly expeditious means of transportation are
used. For example, a West Coast paying bank may use this further
extension to ship a returned check by air courier directly to an East
Coast returning bank even if the check arrives after the returning
bank's cutoff hour. This paragraph applies to the extension of all
midnight deadlines except Saturday midnight deadlines (see paragraph
XVI.C1.b of this appendix).
b. A paying bank may observe a banking day, as defined in the
applicable U.C.C., on a Saturday, which is not a business day and
therefore not a banking day under Regulation CC. In such a case, the
U.C.C. deadline for returning checks received and settled for on
Friday, or for returning checks received on Saturday without settling
for them, might require the bank to return the checks by midnight
Saturday. However, the bank may not have couriers leaving on Saturday
to carry returned checks, and even if it did, the returning or
depositary bank to which the returned checks were sent might not be
open until Sunday night or Monday morning to receive and process
the checks. This paragraph extends the midnight deadline if the
returned checks reach the returning bank by a cut-off hour (usually on
Sunday night or Monday morning) that permits processing during its next
processing cycle or reach the depositary bank by the cut-off hour on
its next banking day following the Saturday midnight deadline. This
paragraph applies exclusively to the extension of Saturday midnight
deadlines.
2. The time limits that are extended in each case are the paying
bank's midnight deadline for returning a check for which it has
already settled and the paying bank's deadline for returning a check
without settling for it in U.C.C. 4--301 and 4--302, §§ 210.9 and
210.12 of Regulation J (12 CFR 210.9 and 210.12), and § 229.36(f)(2)
of this part. As these extensions are designed to speed
(§ 229.30(c)(1)), or at least not slow (§ 229.30(c)(2)), the
overall return of checks, no modification or extension of the
expeditious return requirements in § 229.30(a) is required.
3. The paying bank satisfies its midnight or other return deadline
by dispatching returned checks to another bank by courier, including a
courier under contract with the paying bank, prior to expiration of the
deadline.
4. This paragraph directly affects U.C.C. 4--301 and 4--302 and
§§ 210.9 and 210.12 of Regulation J (12 CFR 210.9 and 210.12) to the
extent that this paragraph applies by its terms, and may affect other
provisions.
D. 229.30(d) Identification of Returned Check
1. The reason for the return must be clearly indicated. A check is
identified as a returned check if the front of that check indicates the
reason for return, even though it does not specifically state that the
check is a returned check. A reason such as "Refer to Maker" is
permissible in appropriate cases. If the returned check is a substitute
check, the reason for return must be placed within the image of the
original check that appears on the front of the substitute check so
that the information is retained on any subsequent substitute check. If
the paying bank places the returned check in a carrier envelope, the
carrier envelope should indicate that it is a returned check but need
not repeat the reason for return stated on the check if it in fact
appears on the check.
E. 229.30(e) Depositary Bank Without Accounts
1. Subpart B of this regulation applies only to "checks"
deposited in transaction-type "accounts." Thus, a depositary bank
with only time or savings accounts need not comply with the
availability requirements of subpart B. Collecting banks will not have
couriers delivering checks to these banks as paying banks, because no
checks are drawn on them.
{{8-31-04 p.7418.83}}Consequently, the
costs of using a courier or other expedited means to deliver returned
checks directly to such a depositary bank may not be justified. Thus,
the expedited return requirement of § 229.30(a) and the notice of
nonpayment requirement of § 229.33 do not apply to checks being
returned to banks that do not hold accounts. The paying bank's midnight
deadline in U.C.C. 4--301 and 4--302 and § 210.12 of Regulation J (12
CFR 210.12) would continue to apply to these checks. Returning banks
also would be required to act on such checks within their midnight
deadline. Further, in order to avoid complicating the process of
returning checks generally, banks without accounts are required to use
the standard indorsement, and their checks are returned by returning
banks and paid for by the depositary bank under the same rules as
checks deposited in other banks, with the exception of the expeditious
return and notice of nonpayment requirements of §§ 229.30(a),
229.31(a), and 229.33.
2. The expeditious return requirements also apply to a check
deposited in a bank that is not a depository institution. Federal
Reserve banks, Federal Home Loan banks, private bankers, and possibly
certain industrial banks are not depository institutions within the
meaning of the EFA Act, and therefore are not subject to the expedited
availability and disclosure requirements of subpart B. These banks do,
however, maintain accounts as defined in
§ 229.2(a), and a paying bank
returning a check to one of these banks would be required to return the
check to the depositary bank, in accordance with the requirements of
this section.
F. 229.30(f) Notice in Lieu of Return
1. A check that is lost or otherwise unavailable for return may be
returned by sending a legible copy of both sides of the check or, if
such a copy is not available to the paying bank, a written notice of
nonpayment containing the information specified in
§ 229.33(b). The copy or
written notice must clearly indicate it is a notice in lieu of return
and must be handled in the same manner as other returned checks. Notice
by telephone, telegraph, or other electronic transmission, other than a
legible facsimile or similar image transmission of both sides of the
check, does not satisfy the requirements for a notice in lieu of
return. The requirement for a writing and the indication that the
notice is a substitute for the returned check is necessary so that the
returning and depositary banks are informed that the notice carries
value. Notice in lieu of return is permitted only when a bank does not
have and cannot obtain possession of the check or must retain
possession of the check for protest. A check is not unavailable for
return if it is merely difficult to retrieve from a filing system or
from storage by a keeper of checks in a truncation system. A notice in
lieu of return may be used by a bank handling a returned check that has
been lost or destroyed, including when the original returned check has
been charged back as lost or destroyed as provided in
§ 229.35(b). A bank using a
notice in lieu of return gives a warranty under § 229.34(a)(4) that
the original check has not been and will not be returned.
2. The requirement of this paragraph supersedes the requirement of
U.C.C. 4--301(a) as to the form and information required of a notice of
dishonor or nonpayment. Reference in the regulation and this commentary
to a returned check includes a notice in lieu of return unless the
context indicates otherwise.
3. The notice in lieu of return is subject to the provisions of
§ 229.30 and is treated like a returned check for settlement
purposes. If the original check is over $2,500, the notice of
nonpayment under § 229.33 is still required, but may be satisfied by
the notice in lieu of return if the notice in lieu meets the time and
information requirements of § 229.33.
4. If not all of the information required by § 229.33(b) is
available, the paying bank may make a claim against any prior bank
handling the check as provided in § 229.35(b).
G. 229.30(g) Reliance on Routing Number
1. Although § 229.35 and
appendix D require
that the depositary bank indorsement contain its nine-digit routing
number, it is possible that a returned check will bear the routing
number of the depositary bank in fractional, nine-digit, or other form.
This paragraph permits a paying bank to rely on the routing number of
the depositary bank as it
{{8-31-04 p.7418.84}}appears on the
check (in the depositary bank's indorsement) when it is received by the
paying bank.
2. If there are inconsistent routing numbers, the paying bank may
rely on any routing number designating the depositary bank. The paying
bank is not required to resolve the inconsistency prior to processing
the check. The paying bank remains subject to the requirement to act in
good faith and use ordinary care under
§ 229.38(a).
XVII. Section 229.31 Returning Bank's Responsibility for
Return of Checks
A. 229.31(a) Return of
Checks
1. The standards for return of checks established by this section
are similar to those for paying banks in § 229.30(a). This section
requires a returning bank to return a returned check expeditiously if
it agrees to handle the returned check for expeditious return under
this paragraph. In effect, the returning bank is an agent or subagent
of the paying bank and a subagent of the depositary bank for the
purposes of returning the check.
2. A returning bank agrees to handle a returned check for
expeditious return to the depositary bank if it:
a. Publishes or distributes availability schedules for the return
of returned checks and accepts the returned check for return;
b. Handles a returned check for return that it did not handle for
forward collection; or
c. Otherwise agrees to handle a returned check for expeditious
return.
3. Two-day/four-day test. As in the case of a paying bank, a
returning bank's return of a returned check is expeditious if it meets
either of two tests. Under the "two-day/four-day" test, the check
must be returned so that it would normally be received by the
depositary bank by 4:00 p.m. either two or four business days after the
check was presented to the paying bank, depending on whether or not the
paying bank is located in the same check processing region as the
depositary bank. This is the same test as the two-day/four-day test
applicable to paying banks. (See Commentary to § 229.30(a).) While a
returning bank will not have first hand knowledge of the day on which a
check was presented to the paying bank, returning banks may, by
agreement, allocate with paying banks liability for late return based
on the delays caused by each. In effect, the two-day/four-day test
protects all paying and returning banks that return checks from claims
that they failed to return a check expeditiously, where the check is
returned within the specified time following presentment to the paying
bank, or a later time as would result from unforeseen delays.
4. Forward collection test.
a. The "forward collection" test is similar to the forward
collection test for paying banks. Under this test, a returning bank
must handle a returned check in the same manner that a similarly
situated collecting bank would handle a check of similar size drawn on
the depositary bank for forward collection. A similarly situated bank
is a bank (other than a Federal Reserve bank) that is of similar asset
size and check handling activity in the same community. A bank has
similar check handling activity if it handles a similar volume of
checks for forward collection as the forward collection volume of the
returning bank.
b. Under the forward collection test, a returning bank must accept
returned checks, including both qualified and other returned checks
("raw returns"), at approximately the same times and process them
according to the same general schedules as checks handled for forward
collection. Thus, a returning bank generally must process even raw
returns on an overnight basis, unless its time limit is extended by one
day to convert a raw return to a qualified returned check.
5. Cut-off hours. A returning bank may establish earlier cut-off
hours for receipt of returned checks than for receipt of forward
collection checks, but the cut-off hour for returned checks may not be
earlier than 2:00 p.m. The returning bank also may set different
sorting requirements for returned checks than those applicable to other
checks. Thus, a returning bank may allow itself more processing time
for returns than for forward collection checks. All returned checks
received by a cut-off hour for returned checks must be processed and
dispatched by the returning bank by the time that it would dispatch
forward
{{8-31-04 p.7418.85}}collection checks
received at a corresponding forward collection cut-off hour that
provides for the same or faster availability for checks destined for
the same depositary banks.
6. Examples.
a. If a returning bank receives a returned check by its cut-off
hour for returned checks on Monday and the depositary bank and the
returning bank are participants in the same clearinghouse, the
returning bank should arrange to have the returned check received by
the depositary bank by Tuesday. This would be the same day that it
would deliver a forward collection check drawn on the depositary bank
and received by the returning bank at a corresponding forward
collection cut-off hour on Monday.
b. i. If a returning bank receives a returned check, and the
returning bank normally would collect a forward collection check drawn
on the depositary bank by sending the forward collection check to a
correspondent or a Federal Reserve bank by courier, the returning bank
could send the returned check in the same manner if the correspondent
has agreed to handle returned checks expeditiously under § 229.31(a).
The returning bank would have to deliver the check by the
correspondent's or Federal Reserve bank's cut-off hour for returned
checks that corresponds to its cut-off hour for forward collection
checks drawn on the depositary bank. A returning bank may take a day to
convert a check to a qualified returned check. Where the forward
collection checks are delivered by courier, mailing the returned checks
would not meet the duty established by this section for returning
banks.
ii. A returning bank must return a check to the depositary bank by
courier or other means as fast as a courier, if similarly situated
returning banks use couriers to deliver their forward collection checks
to the depositary bank.
iii. For some depositary banks, no community practice exists as to
delivery of checks. For example, a credit union whose customers use
payable-through drafts normally does not have checks presented to it
because the drafts are normally sent to the payable-through bank for
collection. In these circumstances, the community standard is
established by taking into account the dollar volume of the checks
being sent to the depositary bank and the location of the depositary
bank, and determining whether similarly situated banks normally would
deliver forward collection checks to the depositary bank, taking into
account the particular risks associated with returned checks. Where the
community standard does not require courier delivery, other means of
delivery, including mail, are acceptable.
7. Qualified returned checks.
a. The expeditious return requirement for a returning bank in this
regulation is more stringent in many cases than the duty of a
collecting bank to exercise ordinary care under U.C.C. 4--202 in
returning a check. A returning bank is under a duty to act as
expeditiously in returning a check as it would in the forward
collection of a check. Notwithstanding its duty of expeditious return,
its midnight deadline under U.C.C. 4--202 and § 210.12(a) of
Regulation J (12 CFR 210.12(a)), under the forward collection test, a
returning bank may take an extra day to qualify a returned check. A
qualified returned check will be handled by subsequent returning banks
more efficiently than a raw return. This paragraph gives a returning
bank an extra business day beyond the time that would otherwise be
required to return the returned check to convert a returned check to a
qualified returned check. The qualified returned check must include the
routing number of the depositary bank, the amount of the check, and a
return identifier encoded on the check in magnetic ink. A check that is
converted to a qualified returned check must be encoded in accordance
with ANS X9.13 for original checks or ANS X9.100--140 for substitute
checks.
b. If the returning bank is sending the returned check directly to
the depositary bank, this extra day is not available because preparing
a qualified returned check will not expedite handling by other banks.
If the returning bank makes an encoding error in creating a qualified
returned check, it may be liable under § 229.38 for losses caused by
any negligence or under § 229.34(c)(3) for breach of an encoding
warranty. The returning bank would not lose the one-day extension
available to it for creating a qualified returned check because of an
encoding error.
8. Routing of returned check.
a. Under § 229.31(a), the returning bank is authorized to route
the returned check in a variety of ways:
{{8-31-04 p.7418.86}}
i. It may send the returned check directly to the depositary bank
by courier or other expeditious means of delivery; or
ii. It may send the returned check to any returning bank agreeing
to handle the returned check for expeditious return to the depositary
bank under this section regardless of whether or not the returning bank
handled the check for forward collection.
b. If the returning bank elects to send the returned check directly
to the depositary bank, it is not required to send the check to the
branch of the depositary bank that first handled the check. The
returned check may be sent to the depositary bank at any location
permitted under § 229.32(a).
9. Responsibilities of returning bank. In meeting the requirements
of this section, the returning bank is responsible for its own actions,
but not those of the paying bank, other returning banks, or the
depositary bank. (See U.C.C. 4--202(c) regarding the responsibility of
collecting banks.) For example, if the paying bank has delayed the
start of the return process, but the returning bank acts in a timely
manner, the returning bank may satisfy the requirements of this section
even if the delayed return results in a loss to the depositary bank.
(See § 229.38.) A returning
bank must handle a notice in lieu of return as expeditiously as a
returned check.
10. U.C.C. sections affected. This paragraph directly affects the
following provisions of the U.C.C., and may affect other sections or
provisions:
a. Section 4--202(b), in that time limits required by that section
may be affected by the additional requirement to make an expeditious
return.
b. Section 4--214(a), in that settlement for returned checks is
made under § 229.31(c) and not by charge-back of provisional credit,
and in that the time limits may be affected by the additional
requirement to make an expeditious return.
B. 229.31(b) Unidentifiable Depositary Bank
1. This section is similar to § 229.30(b), but applies to
returning banks instead of paying banks. In some cases a returning bank
will be unable to identify the depositary bank with respect to a check.
Returning banks agreeing to handle checks for return to depositary
banks under § 229.31(a) are expected to be expert in identifying
depositary bank indorsements. In the limited cases where the returning
bank cannot identify the depositary bank, the returning bank may send
the returned check to a returning bank that agrees to handle the
returned check for expeditious return under § 229.31(a), or it may
send the returned check to a bank that handled the check for forward
collection, even if that bank does not agree to handle the returned
check expeditiously under § 229.31(a).
2. If the returning bank itself handled the check for forward
collection, it may send the returned check to a collecting bank that
was prior to it in the forward collection process, which will be better
able to identify the depositary bank. If there are no prior collecting
banks, the returning bank must research the collection of the check and
identify the depositary bank. As in the case of paying banks under
§ 229.30(b), a returning
bank's sending of a check to a bank that handled the check for forward
collection under § 229.31(b) is not subject to the expeditious return
requirements of § 229.31(a).
3. The returning bank's return of a check under this paragraph is
subject to the midnight deadline under U.C.C. 4--202(b). (See
definition of returning bank in
§ 229.2(cc).)
4. Where a returning bank receives a check that it does not agree
to handle expeditiously under § 229.31(a), such as a check sent to it
under § 229.30(b), but the returning bank is able to identify the
depositary bank, the returning bank must thereafter return the check
expeditiously to the depositary bank. The returning bank returns a
check expeditiously under this paragraph if it returns the check by the
same means it would use to return a check drawn on it to the depositary
bank or by other reasonably prompt means.
5. As in the case of a paying bank returning a check under
§ 229.30(b), a returning bank returning a check under this paragraph
to a bank that has not agreed to handle the check expeditiously must
advise that bank that it is unable to identify the depositary bank.
This advice must be conspicuous, such as a stamp on each check for
which the depositary bank is unknown if such checks are commingled with
other returned checks, or, if such
{{8-31-04 p.7418.87}}checks are sent
in a separate cash letter, by one notice on the cash letter. The
returned check may not be prepared for automated return.
C. 229.31(c) Settlement
1. Under the U.C.C., a collecting bank receives settlement for a
check when it is presented to the paying bank. The paying bank may
recover the settlement when the paying bank returns the check to the
presenting bank. Under this regulation, however, the paying bank may
return the check directly to the depositary bank or through returning
banks that did not handle the check for forward collection. On these
more efficient return paths, the paying bank does not recover the
settlement made to the presenting bank. Thus, this paragraph requires
the returning bank to settle for a returned check (either with the
paying bank or another returning bank) in the same way that it would
settle for a similar check for forward collection. To achieve
uniformity, this paragraph applies even if the returning bank handled
the check for forward collection.
2. Any returning bank, including one that handled the check for
forward collection, may provide availability for returned checks
pursuant to an availability schedule as it does for forward collection
checks. These settlements by returning banks, as well as settlements
between banks made during the forward collection of a check, are
considered final when made subject to any deferment of availability.
(See § 229.36(d) and
Commentary to § 229.35(b).)
3. A returning bank may vary the settlement method it uses by
agreement with paying banks or other returning banks. Special rules
apply in the case of insolvency of banks. (see
§ 229.39.) If payment cannot
be obtained from a depositary or returning bank because of its
insolvency or otherwise, recovery can be had by returning, paying, and
collecting banks from prior banks on this basis of the liability of
prior banks under
§ 229.35(b).
4. This paragraph affects U.C.C. 4--214(a) in that a paying or
collecting bank does not ordinarily have a right to charge back against
the bank from which it received the returned check, although it is
entitled to settlement if it returns the returned check to that bank,
and may affect other sections or provisions. Under § 229.36(d), a
bank collecting a check remains liable to prior collecting banks and
the depositary bank's customer under the U.C.C.
D. 229.31(d) Charges
1. This paragraph permits any returning bank, even one that handled
the check for forward collection, to impose a fee on the paying bank or
other returning bank for its service in handling a returned check.
Where a claim is made under § 229.35(b), the bank on which the claim
is made is not authorized by this paragraph to impose a charge for
taking up a check. This paragraph preempts state laws to the extent
that these laws prevent returning banks from charging fees for handling
returned checks.
E. 229.31(e) Depositary Bank Without Accounts
1. This paragraph is similar to § 229.30(e) and relieves a
returning bank of its obligation to make expeditious return to a
depositary bank that does not maintain any accounts. (See the
Commentary to § 229.30(e).)
F. 229.31(f) Notice in Lieu of Return
1. This paragraph is similar to § 229.30(f) and authorizes a
returning bank to originate a notice in lieu of return if the returned
check is unavailable for return. Notice in lieu of return is permitted
only when a bank does not have and cannot obtain possession of the
check or must retain possession of the check for protest. A check is
not unavailable for return if it is merely difficult to retrieve from a
filing system or from storage by a keeper of checks in a truncation
system. (See the Commentary to § 229.30(f).)
G. 229.31(g) Reliance on Routing Number
1. This paragraph is similar to § 229.30(g) and permits a
returning bank to rely on routing numbers appearing on a returned check
such as routing numbers in the depositary bank's indorsement or on
qualified returned checks. (See the Commentary to
§ 229.30(g).)
{{8-31-04 p.7418.88}}
XVIII. Section
229.32 Depositary Bank's Responsibility for Returned Checks
A. 229.32(a) Acceptance of Returned Checks
1. This regulation seeks to encourage direct returns by paying and
returning banks and may result in a number of banks sending checks to
depositary banks with no preexisting arrangements as to where the
returned checks should be delivered. This paragraph states where the
depositary bank is required to accept returned checks and written
notices of nonpayment under § 229.33. (These locations differ from
locations at which a depositary bank must accept electronic notices.)
It is derived from U.C.C. 3--111, which specifies that presentment for
payment may be made at the place specified in the instrument or, if
there is none, at the place of business of the party to pay. In the
case of returned checks, the depositary bank does not print the check
and can only specify the place of "payment" of the returned check
in its indorsement.
2. The paragraph specifies four locations at which the depositary
bank must accept returned checks:
a. The depositary bank must accept returned checks at any location
at which it requests presentment of forward collection checks such as a
processing center. A depositary bank does not request presentment of
forward collection checks at a branch of the bank merely by paying
checks presented over the counter.
b. i. If the depositary bank indorsement states the name and
address of the depositary bank, it must accept returned checks at the
branch, head office, or other location, such as a processing center,
indicated by the address. If the address is too general to identify a
particular location, then the depositary bank must accept returned
checks at any branch or head office consistent with the address. If,
for example, the address is "New York, New York," each branch in
New York City must accept returned checks.
ii. If no address appears in the depositary bank's indorsement, the
depositary bank must accept returned checks at any branch or head
office associated with the depositary bank's routing number. The
offices associated with the routing number of a bank are found in
American Bankers Association Key to Routing Numbers,
published by an agent of the American Bankers Association, which
lists a city and state address for each routing number.
iii. The depositary bank must accept returned checks at the address
in its indorsement and at an address associated with its routing number
in the indorsement if the written address in the indorsement and the
address associated with the routing number in the indorsement are not
in the same check processing region. Under
§§ 229.30(g) and
229.31(g), a paying or
returning bank may rely on the depositary bank's routing number in its
indorsement in handling returned checks and is not required to send
returned checks to an address in the depositary bank's indorsement that
is not in the same check processing region as the address associated
with the routing number in the indorsement.
iv. If no routing number or address appears in its indorsement, the
depositary bank must accept a returned check at any branch or head
office of the bank. The indorsement requirement of § 229.35 and
appendix D requires that the indorsement contain a routing number, a
name, and a location. Consequently, this provision, as well as
paragraph (a)(2)(ii) of this section, only applies where the depositary
bank has failed to comply with the indorsement requirement.
3. For ease of processing, a depositary bank may require that
returning or paying banks returning checks to it separate returned
checks from forward collection checks being presented.
4. Under § 229.33(d), a
depositary bank receiving a returned check or notice of nonpayment must
send notice to its customer by its midnight deadline or within a longer
reasonable time.
B. 229.32(b) Payment
1. As discussed in the commentary to § 229.31(c), under this
regulation a paying or returning bank does not obtain credit for a
returned check by charge-back but by, in effect, presenting the
returned check to the depositary bank. This paragraph imposes an
obligation
{{8-31-04 p.7418.89}}to "pay" a
returned check that is similar to the obligation to pay a forward
collection check by a paying bank, except that the depositary bank may
not return a returned check for which it is the depositary bank. Also,
certain means of payment, such as remittance drafts, may be used only
with the agreement of the returning bank.
2. The depositary bank must pay for a returned check by the close
of the banking day on which it received the returned check. The day on
which a returned check is received is determined pursuant to U.C.C.
4--108, which permits the bank to establish a cut-off our, generally
not earlier than 2:00 p.m., and treat checks received after that hour
as being received on the next banking day. If the depositary bank is
unable to make payment to a returning or paying bank on the banking day
that it receives the returned check, because the returning or paying
bank is closed for a holiday or because the time when the depositary
bank received the check is after the close of Fedwire, e.g., west coast
banks with late cut-off hours, payment may be made on the next banking
day of the bank receiving payment.
3. Payment must be made so that the funds are available for use by
the bank returning the check to the depositary bank on the day the
check is received by the depositary bank. For example, a depositary
bank meets this requirement if it sends a wire transfer of funds to the
returning or paying bank on the day it receives the returned check,
even if the returning or paying bank has closed for the day. A wire
transfer should indicate the purpose of the payment.
A bank must identify an item of information if the bank is uncertain
as to that item's accuracy. A bank may make this identification by
setting the item off with question marks, asterisks, or other symbols
designated for this purpose by generally applicable industry standards.
4. The depositary bank use a net settlement arrangement to settle
for a returned check. Banks with net settlement agreements could net
the appropriate credits and debits for returned checks with the
accounting entries for forward collection checks if they so desired.
If, for purposes of establishing additional controls or for other
reasons, the banks involved desired a separate settlement for returned
checks, a separate net settlement agreement could be established.
5. The bank sending the returned check to the depositary bank may
agree to accept payment at a later date if, for example, it does not
believe that the amount of the returned check or checks warrants the
costs of same-day payment. Thus, a returning or paying bank may agree
to accept payment through an ACH credit or debit transfer that settles
the day after the returned check is received instead of a wire transfer
that settles on the same day.
6. This paragraph and this subpart do not affect the depositary
bank's right to recover a provisional settlement with its nonbank
customer for a check that is returned. (See also
§§ 229.19(c)(2)(ii),
229.33(d) and
229.35(b).)
C. 229.32(c) Misrouted Returned Checks
1. This paragraph permits a bank receiving a check on the basis
that it is the depositary bank to send the misrouted returned check to
the correct depositary bank, if it can identify the correct depositary
bank, either directly or through a returning bank agreeing to handle
the check expeditiously under
§ 229.30(a). In these cases,
the bank receiving the check is acting as a returning bank.
Alternatively, the bank receiving the misrouted returned check must
send the check back to the bank from which it was received. In either
case the bank to which the returned check was misrouted could receive
settlement for the check. The depositary bank would be required to pay
for the returned check under § 229.32(b), and any other bank to which
the check is sent under this paragraph would be required to settle for
the check as a returning bank under
§ 229.31(c). If the check
was originally received "free," that is, without a charge for the
check, the bank incorrectly receiving the check would have to return
the check, without a charge, to the bank from which it came. The bank
to which the returned check was misrouted is required to act promptly
but is not required to meet the expeditious return requirements of
§ 229.31(a); however, it must act within its midnight deadline. This
paragraph does not affect a bank's duties under
§ 229.35(b).
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D. 229.32(d) Charges
1. This paragraph prohibits a depositary bank from charging the
equivalent of a presentment fee for returned checks. A returning bank,
however, may charge a fee for handling returned checks. If the
returning bank receives a mixed cash letter of returned checks, which
includes some checks for which the returning bank also is the
depositary bank, the fee may be applied to all the returned checks in
the cash letter. In the case of a sorted cash letter containing only
returned checks for which the returning bank is the depositary bank,
however, no fee may be charged.
XIX. Section
229.33 Notice of Nonpayment
A. 229.33(a) Requirement
1. Notice of nonpayment as required by this section and written
notice in lieu of return as provided in
§§ 229.30(f) and
229.31(f) serve different
functions. The two kinds of notice, however, must meet the content
requirements of this section. The paying bank must send a notice of
nonpayment if it decides not to pay a check of $2,500 or more. A paying
bank may rely on an amount encoded on the check in magnetic ink to
determine whether the check is in the amount of $2,500 or more. The
notice of nonpayment carries no value, and the check itself (or the
notice in lieu of return) must be returned. The paying bank must ensure
that the notice of nonpayment is received by the depositary bank by
4:00 p.m. local time on the second business day following presentment.
A bank identified by routing number as the paying bank is considered
the paying bank under this regulation and would be required to create a
notice of nonpayment even though that bank determined that the check
was not drawn by a customer of that bank. (See Commentary to the
definition of paying bank in
§ 229.2(z).)
2. The paying bank should not send a notice of nonpayment until it
has finally determined not to pay the check. Under
§ 229.34(b), by sending the
notice the paying bank warrants that it has returned or will return the
check. If a paying bank sends a notice and subsequently decides to pay
the check, the paying bank may mitigate its liability on this warranty
by notifying the depositary bank that the check has been paid.
3. Because the return of the check itself may serve as the required
notice of nonpayment, in many cases no notice other than the return of
the check will be necessary. For example, in many cases the return of a
check through a clearinghouse to another participant of the
clearinghouse will be made in time to meet the time requirements of
this section. If the check normally will not be received by the
depositary bank within the time limits for notice, the return of the
check will not satisfy the notice requirement. In determining whether
the returned check will satisfy the notice requirement, the paying bank
may rely on the availability schedules of returning banks as the time
that the returned check is expected to be delivered to the depositary
bank unless the paying bank has reason to know the availability
schedules are inaccurate.
4. Unless the returned check is used to satisfy the notice
requirement, the requirement for notice is independent of and does not
affect the requirements for timely and expeditious return of the check
under § 229.30 and the U.C.C. (See
§ 229.30(a).) If a paying
bank fails both to comply with this section and to comply with the
requirements for timely and expeditious return under § 229.30 and the
U.C.C. and Regulation J (12 CFR part 210), the paying bank shall be
liable under either this section or such other requirements, but not
both. (See § 229.38(b).) A paying bank is not responsible for failure
to give notice of nonpayment to a party that has breached a presentment
warranty under U.C.C. 4--208, notwithstanding that the paying bank may
have returned the check. (See U.C.C. 4--208 and 4--302.)
B. 229.33(b) Content of Notices
1. This paragraph provides that the notice must at a minimum
contain eight elements which are specifically enumerated. In the case
of written notices, the name and routing number of the depositary bank
also are required.
{{12-30-05 p.7418.91}}
2. If the paying bank cannot identify the depositary bank from the
check itself, it may wish to send the notice to the earliest collecting
bank it can identify and indicate that the notice is not being sent to
the depositary bank. The collecting bank may be able to identify the
depositary bank and forward the notice, but is under no duty to do so.
In addition, the collecting bank may actually be the depositary bank.
C. 229.33(c) Acceptance of Notice
1. In the case of a written notice, the depositary bank is required
to accept notices at the locations specified in § 229.32(a). In the
case of telephone notices, the bank may not refuse to accept notices at
the telephone numbers identified in this section, but may transfer
calls or use a recording device. Banks may vary by agreement the
location and manner in which notices are received.
D. 229.33(d) Notification to Customer
1. This paragraph requires a depositary bank to notify its customer
of nonpayment upon receipt of a returned check or notice of nonpayment,
regardless of the amount of the check or notice. This requirement is
similar to the requirement under the U.C.C. as interpreted in
Appliance Buyers Credit Corp. v. Prospect National Bank, 708
F.2d 290 (7th Cir. 1983), that a depositary bank may be liable for
damages incurred by its customer for its failure to give its customer
timely advice that it has received a notice of nonpayment. Notice also
must be given if a depositary bank receives a notice of recovery under
§ 229.35(b). A bank that
chooses to provide the notice required by § 229.33(d) in writing may
send the notice by e-mail or facsimile if the bank sends the notice to
the e-mail address or facsimile number specified by the customer for
that purpose. The notice to the customer required under this paragraph
also may satisfy the notice requirement of § 229.13(g) if the
depositary bank invokes the reasonable-cause exception of § 229.13(e)
due to the receipt of a notice of nonpayment, provided the notice meets
all the requirements of § 229.13(g). The notice to the customer
required under this paragraph also may satisfy the notice requirement
of § 229.13(g) if the depositary bank invokes the reasonable cause
exception of § 229.13(e) due to the receipt of a notice of
nonpayment, provided the notice meets the other requirements of
§ 229.13(g).
XX. Section 229.34 Warranties
A. 229.34(a) Warranty of Returned Check
1. This paragraph includes warranties that a returned check,
including a notice in lieu of return, was returned by the paying bank,
or in the case of a check payable by a bank and payable through another
bank, the bank by which the check is payable, within the deadline under
the U.C.C. (subject to any claims or defenses under the U.C.C., such as
breach of a presentment warranty), Regulation J (12 CFR part 210), or
§ 229.30(c); that the paying
or returning bank is authorized to return the check; that the returned
check has not been materially altered; and that, in the case of a
notice in lieu of return, the original check has not been and will not
be returned for payment. The warranty does not include a warranty that
the bank complied with the expeditious return requirements of
§§ 229.30(a) and
229.31(a). These warranties do
not apply to checks drawn on the United States Treasury, to U.S. Postal
Service money orders, or to checks drawn on a state or a unit of
general local government that are not payable through or at a bank.
(See § 229.42.)
B. 229.34(b) Warranty of Notice of Nonpayment
1. This paragraph provides for warranties for notices of
nonpayment. This warranty does not include a warranty that the notice
is accurate and timely under
§ 229.33. The requirements
of § 229.33 that are not covered by the warranty are subject to the
liability provisions of
§ 229.38. These warranties
are designed to give the depositary bank more confidence in relying on
notices of nonpayment. This paragraph imposes liability on a paying
bank that gives notice of nonpayment and then subsequently returns the
check. (See Commentary on § 229.33(a).)
{{12-30-05 p.7418.92}}
C. 229.34(c) Warranty of Settlement Amount, Encoding, and Offset
1. Paragraph (c)(1) provides that a bank that presents and receives
settlement for checks warrants to the paying bank that the
settlement it demands (e.g., as noted on the cash letter) equals the
total amount of the checks it presents. This paragraph gives the paying
bank a warranty claim against the presenting bank for the amount of any
excess settlement made on the basis of the amount demanded, plus
expenses. If the amount demanded is understated, a paying bank
discharges its settlement obligation under U.C.C. 4--301 by paying the
amount demanded, but remains liable for the amount by which the demand
is understated; the presenting bank is nevertheless liable for expenses
in resolving the adjustment.
2. When checks or returned checks are transferred to a collecting,
returning, or depositary bank, the transfer bank is not required to
demand settlement, as is required upon presentment to the paying bank.
However, often the checks or returned checks will be accompanied by
information (such as a cash letter listing) that will indicate the
total of the checks or returned checks. Paragraph (c)(2) provides if
the transferor bank includes information indicating the total amount of
checks or returned checks transferred, it warrants that the information
is correct (i.e., equals the actual total of the items).
3. Paragraph (c)(3) provides that a bank that presents or transfers
a check or returned check warrants the accuracy of the magnetic ink
encoding that was placed on the item after issue, and that exists at
the time of presentment or transfer, to any bank that subsequently
handles the check or returned check. Under U.C.C. 4--209(a), only the
encoder (or the encoder and the depositary bank, if the encoder is a
customer of the depositary bank) warrants the encoding accuracy, thus
any claims on the warranty must be directed to the encoder. Paragraph
(c)(3) expands on the U.C.C. by providing that all banks that transfer
or present a check or returned check make the encoding warranty. In
addition, under the U.C.C., the encoder makes the warranty to
subsequent collecting banks and the paying bank, while paragraph (c)(3)
provides that the warranty is made to banks in the return chain as
well. Paragraph (c)(3) applies to all MICR-line encoding on a
substitute check.
4. A paying bank that settles for an overstated cash letter because
of a misencoded check may make a warranty claim against the presenting
bank under paragraph (c)(1) (which would require the paying bank to
show that the check was part of the overstated cash letter) or an
encoding warranty claim under paragraph (c)(3) against the presenting
bank or any preceding bank that handled the misencoded check.
5. Paragraph (c)(4) provides that a paying bank or a depositary
bank may set off excess settlement paid to another bank against
settlement owed to that bank for checks presented or returned checks
received (for which it is the depositary bank) subsequent to the excess
settlement.
D. 229.34(d) Transfer and Presentment Warranties
1. A bank that transfers or presents a remotely created check and
receives a settlement or other consideration warrants that the person
on whose account the check is drawn authorized the issuance of the
check in the amount stated on the check and to the payee stated on the
check. The warranties are given only by banks and only to subsequent
banks in the collection chain. The warranties ultimately shift
liability for the loss created by an unauthorized remotely created
check to the depositary bank. The depositary bank cannot assert the
transfer and presentment warranties against a depositor. However, a
depositary bank may, by agreement, allocate liability for such an item
to the depositor and also may have a claim under other laws against
that person.
2. The transfer and presentment warranties for remotely created
checks supplement the Federal Trade Commission's Telemarketing Sales
Rule, which requires telemarketers that submit checks for payment to
obtain the customer's "express verifiable authorization" (the
authorization may be either in writing or tape recorded and must be
made available upon request to the customer's bank). 16 CFR
310.3(a)(3). The transfer and presentment warranties shift liability to
the depositary bank only when the remotely created check is
unauthorized, and would not apply when the customer initially
authorizes a check but then experiences "buyer's remorse" and
subsequently tries to revoke the authorization by
{{12-30-05 p.7418.93}}asserting a claim
against the paying bank under U.C.C. 4--401. If the depositary bank
suspects "buyer's remorse," it may obtain from its customer the
express verifiable authorization of the check by the paying bank's
customer, required under the Federal Trade Commission's Telemarketing
Sales Rule, and use that authorization as a defense to the warranty
claim.
3. The scope of the transfer and presentment warranties for
remotely created checks differs from that of the corresponding U.C.C.
warranty provisions in two respects. The U.C.C. warranties differ from
the § 229.34(d) warranties in that they are given by any person,
including a nonbank depositor, that transfers a remotely created check
and not just to a bank, as is the case under § 229.34(d). In
addition, the U.C.C. warranties state that the person on whose account
the item is drawn authorized the issuance of the item in the amount for
which the item is drawn. The § 229.34(d) warranties specifically
cover the amount as well as the payee stated on the check. Neither the
U.C.C. warranties, nor the § 229.34(d) warranties apply to the date
stated on the remotely created check.
4. A bank making the § 229.34(d) warranties may defend a claim
asserting violation of the warranties by proving that the customer of
the paying bank is precluded by U.C.C. 4--406 from making a claim
against the paying bank. This may be the case, for example, if the
customer failed to discover the unauthorized remotely created check in
a timely manner.
5. The transfer and presentment warranties for a remotely created
check apply to a remotely created check that has been reconverted to a
substitute check.
E. 229.34(d) Damages
1. This paragraph adopts for the warranties in § 229.34(a), (b),
and (c) the damages provided in U.C.C. 4--207(c) and 4A--506(b). (See
definition of interest compensation in
§ 229.2(oo).)
F. 229.34(e) Tender of Defense
1. This paragraph adopts for this regulation the vouching-in
provisions of U.C.C. 3--119.
G. F.229.34(f) Notice of Claim
1. This paragraph adopts the notice provisions of U.C.C. sections
4--207(d) and 4--208(e). The time limit set forth in this paragraph
applies to notices of claims for warranty breaches only. As provided in
§ 229.38(g), all actions under this section must be brought within
one year after the date of the occurrence of the violation involved.
XXI. Section
229.35 Indorsements
A. 229.35(a) Indorsement Standards
1. This section and appendix D require banks to use a standard form
of indorsement when indorsing checks during the forward collection and
return process. The standard provides for indorsements by all
collecting and returning banks, plus a unique standard for depository
bank indorsements. It is designed to facilitate the identification of
the depositary bank and the prompt return of checks. The regulation
places a duty on banks to ensure that their indorsements can be
interpreted by any person. The indorsement standard specifies the
information each indorsement must contain and its location and ink
color.
2. Banks generally apply indorsements to a paper check in one of
two ways: (1) banks print or "spray" indorsements onto a check
when the check is processed through the banks" automated check
sorters (regardless of whether the checks are original checks or
substitute checks), and (2) reconverting banks print or "overlay"
previously applied electronic indorsements and their own indorsements
and identifications onto a substitute check at the time that the
substitute check is created. If a subsequent substitute check is
created in the course of collection or return, that substitute check
will contain, in its image of the back of the previous substitute
check, reproductions of indorsements that were sprayed or overlaid onto
the previous item. For purposes of the indorsement standard set forth
in appendix D, a reproduction of a previously applied sprayed or
overlaid indorsement contained within an image of a check does not
constitute "an indorsement that previously
{{12-30-05 p.7418.94}}was applied
electronically." To accommodate these two indorsement scenarios, the
appendix includes two indorsement location specifications: one standard
applies to banks spraying indorsements onto existing paper original
checks and substitute checks, and another applies to reconverting banks
overlaying indorsements that previously were applied electronically and
their own indorsements onto substitute checks at the time the
substitute checks are created.
3. A bank might use check processing equipment that captures an
image of a check prior to spraying an indorsement onto that item. If
the bank truncates that item, it should ensure that it also applies an
indorsement to the item electronically. A reconverting bank satisfies
its obligation to preserve all previously applied indorsements by
overlaying a bank's indorsement that previously was applied
electronically onto a substitute check that the reconverting bank
creates.
4. The location of an indorsement applied to an original paper
check in accordance with appendix D may shift if that check is
truncated and later reconverted to a substitute check. If an
indorsement applied tot he original check in accordance with appendix D
is overwritten by a subsequent indorsement applied to the substitute
check in accordance with appendix D, then one or both of those
indorsements could be rendered illegible. As explained in § 229.38(d)
and the commentary thereto, a reconverting bank is liable for losses
associated with indorsements that are rendered illegible as a result of
check substitution.
5. To ensure that indorsements can be easily read and would remain
legible after an image of a check is captured, the standard requires
all indorsements applied to original checks and substitute check to be
printed in black ink as of January 1, 2006.
6. The standard requires the depositary bank's indorsement to
include (1) its nine-digit routing number set off by an arrow at each
end of the routing number and, if the depositary bank is a reconverting
bank with respect to the check, an asterisk outside the arrow at each
end of the routing number to identify the bank as a reconverting bank;
(2) the indorsement date; and (3) if the indorsement is applied
physically, name or location information. The standard also permits but
does not require the indorsement to include other identifying
information. The standard requires a collecting bank's or returning
bank's indorsement to include only (1) the bank's nine digit routing
number (without arrows) and, if the collecting bank or returning bank
is a reconverting bank with respect to the check, an asterisk at each
end of the number to identify the bank as a reconverting bank, (2) the
indorsement date, and (3) an optional trace or sequence number.
7. Depositary banks should not include information that can be
confused with required information. For example a nine-digit zip code
could be confused with the nine-digit routing number.
8. A depositary bank may want to include an address in its
indorsement in order to limit the number of locations at which it must
receive returned checks. In instances where this address is not
consistent with the routing number in the indorsement, the depositary
bank is required to receive returned checks at a branch or head office
consistent with the routing number. Banks should note, however, that
§ 229.32 requires a depositary bank to receive returned checks at the
location(s) at which it receives forward-collection checks.
9. In addition to indorsing a substitute check in accordance with
appendix D, a reconverting bank must identify itself and the truncating
bank by applying its routing number and the routing number of the
truncating bank to the front of the check in accordance with appendix D
and ANS X9.100--140. Further, if the reconverting bank is the paying
bank, it also must identify itself by applying its routing number to
the back of the check in accordance with appendix D. In these
instances, the reconverting bank and truncating bank routing numbers
are for identification purposes only and are not indorsements or
acceptances.
10. Under the U.C.C., a specific guarantee of prior indorsement is
not necessary. (See U.C.C. 4--207(a) and 4--208(a). Use of guarantee
language in indorsements, such as "P.E.G." ("prior
indorsements guaranteed"), may result in reducing the type size used
in bank indorsements, thereby making them more difficult to read. Use
of this language may
{{12-30-05 p.7418.94-A}}make
it more difficult for other banks to identify the depositary bank.
Subsequent collecting bank indorsements may not include this language.
11. If the bank maintaining the account into which a check is
deposited agrees with another bank (a correspondent, ATM operator, or
lock box operator) to have the other bank accept returns and notices of
nonpayment for the bank of account, the indorsement placed on the check
as the depositary bank indorsement may be the indorsement of the bank
that acts as correspondent, ATM operator, or lock box operator as
provided in paragraph (d) of this section.
12. The backs of many checks bear preprinted information or blacked
out areas for various reasons. For example, some checks are printed
with a carbon band across the back that allows the transfer of
information from the check to a ledger with one writing. Also,
contracts or loan agreements are printed on certain checks. Other
checks that are mailed to recipients may contain areas on the back that
are blacked out so that they may not be read through the mailer. On the
deposit side, the payee of the check may place its indorsement or
information identifying the drawer of the check in the area specified
for the depositary bank indorsement, thus making the depositary bank
indorsement unreadable.
13. The indorsement standard does not prohibit the use of a carbon
band or other printed or written matter on the backs of checks and does
not require banks to avoid placing their indorsements in these areas.
Nevertheless, checks will be handled more efficiently if depositary
banks design indorsement stamps so that the nine-digit routing number
avoids the carbon band area. Indorsing parties other than banks, e.g.,
corporations, will benefit from the faster return of checks if they
protect the identifiability and legibility of the depositary bank
indorsement by staying clear of the area reserved for the depositary
bank indorsement.
14. Section 229.38(d)
allocates responsibility for loss resulting from a delay in return of a
check due to indorsements that are unreadable because of material on
the back of the check. The depositary bank is responsible for a loss
resulting from a delay in return caused by the condition of the check
arising after its issuance until its acceptance by the depositary bank
that made the depositary bank's indorsement illegible. The paying bank
is responsible for loss resulting from a delay in return caused by
indorsements that are not readable because of other material on the
back of the check at the time that it was issued. Depositary and paying
banks may shift these risks to their customers by agreement.
15. The standard does not require the paying bank to indorse the
check; however, if a paying bank does indorse a check that is returned,
it should follow the indorsement standard for collecting banks
returning banks. The standard requires collecting and returning banks
to indorse the check for tracing purposes. With respect to the
identification of a paying bank that is also a reconverting bank, see
the commentary to § 229.51(b)(2).
B. 229.35(b) Liability of Bank Handling Check
1. When a check is sent for forward collection, the collection
process results in a chain of indorsements extending from the
depositary bank through any subsequent collecting banks to the paying
bank. This section extends the indorsement chain through the paying
bank to the returning banks, and would permit each bank to recover from
any prior indorser if the claimant bank does not receive payment for
the check from a subsequent bank in the collection or return chain. For
example, if a returning bank returned a check to an insolvent
depositary bank, and did not receive the full amount of the check from
the failed bank, the returning bank could obtain the unrecovered amount
of the check from any bank prior to it in the collection and return
chain including the paying bank. Because each bank in the collection
and return chain could recover from a prior bank, any loss would fall
on the first collecting bank that received the check from the
depositary bank. To avoid circuitry of actions, the returning bank
could recover directly from the first collecting bank. Under the
U.C.C., the first collecting bank might ultimately recover from the
depositary bank's customer or from the other parties on the check.
2. Where a check is returned through the same banks used for the
forward collection of the check, priority during the forward collection
process controls over priority in the return process for the purpose of
determining prior and subsequent banks under this
regulation.
{{8-29-03 p.7418.95}}
3. Where a returning bank is insolvent and fails to pay the paying
bank or a prior returning bank for a returned check,
§ 229.39(a) requires the
receiver of the failed bank to return the check to the bank that
transferred the check to the failed bank. That bank then either could
continue the return to the depositary bank or recover based on this
paragraph. Where the paying bank is insolvent, and fails to pay the
collecting bank, the collecting bank also could recover from a prior
collecting bank under this paragraph, and the bank from which it
recovered could in turn recover from its prior collecting bank until
the loss settled on the depositary bank (which could recover from its
customer).
4. A bank is not required to make a claim against an insolvent bank
before exercising its right to recovery under this paragraph. Recovery
may be made by charge-back or by other means. This right of recovery
also is permitted even where nonpayment of the check is the result of
the claiming bank's negligence such as failure to make expeditious
return, but the claiming bank remains liable for its negligence under
§ 229.38.
5. This liability is imposed on a bank handling a check for
collection or return regardless of whether the bank's indorsement
appears on the check. Notice must be sent under this paragraph to a
prior bank from which recovery is sought reasonably promptly after a
bank learns that it did not receive payment from another bank, and
learns the identity of the prior bank. Written notice reasonably
identifying the check and the basis for recovery is sufficient if the
check is not available. Receipt of notice by the bank against which the
claim is made is not a precondition to recovery by charge-back or other
means; however, a bank may be liable for negligence for failure to
provide timely notice. A paying or returning bank also may recover from
a prior collecting bank as provided in
§§ 229.30(b) and
229.31(b). This provision is
not a substitute for a paying or returning bank making expeditious
return under §§ 229.30(a) or 229.31(b). This paragraph does not
affect a paying bank's accountability for a check under U.C.C.
4--215(a) and 4--302. Nor does this paragraph affect a collecting
bank's accountability under U.C.C. 4--213 and 4--215(d). A collecting
bank becomes accountable upon receipt of final settlement as provided
in the foregoing U.C.C. sections. The term final settlement in
§§ 229.31(c) and 229.32(b), and 229.36(d) is intended to be
consistent with the use of the term final settlement in the U.C.C.
(e.g., U.C.C. 4--213, 4--214, and 4--215). (See also § 229.2(cc) and
Commentary).
6. This paragraph also provides that a bank may have the rights of
a holder based on the handling of the check for collection or return. A
bank may become a holder or a holder in due course regardless of
whether prior banks have complied with the indorsement standard in
§ 229.35(a) and appendix D.
7. This paragraph affects the following provisions of the U.C.C.,
and may affect other provisions:
a. Section 4--214(a), in that the right to recovery is not based on
provisional settlement, and recovery may be had from any prior bank.
Section 4--214(a) would continue to permit a depositary bank to recover
a provisional settlement from its customer. (See
§ 229.33(d).)
b. Section 3--415 and related provisions (such as section 3--503),
in that such provisions would not apply as between banks, or as between
the depositary bank and its customer.
C. 229.35(c) Indorsement by Bank
1. This section protects the rights of a customer depositing a
check in a bank without requiring the words "pay any bank," as
required by the U.C.C. (See U.C.C. 4--201(b).) Use of this language in
a depositary bank's indorsement will make it more difficult for other
banks to identify the depositary bank. The indorsement standard in
appendix D prohibits such material in subsequent collecting bank
indorsements. The existence of a bank indorsement provides notice of
the restrictive indorsement without any additional words.
D. 229.35(d) Indorsement for Depositary Bank
1. This section permits a depositary bank to arrange with another
bank to indorse checks. This practice may occur when a correspondent
indorses for a respondent, or when the bank servicing an ATM or lock
box indorses for the bank maintaining the account in which the check is
deposited--i.e., the depositary bank. If the indorsing bank applies
the
{{8-29-03 p.7418.96}}depositary bank's
indorsement, checks will be returned to the depositary bank. If the
indorsing bank does not apply the depositary bank's indorsement, by
agreement with the depositary bank it may apply its own indorsement as
the depositary bank indorsement. In that case, the depositary bank's
own indorsement on the check (if any) should avoid the location
reserved for the depositary bank. The actual depositary bank remains
responsible for the availability and other requirements of Subpart B,
but the bank indorsing as depositary bank is considered the depositary
bank for purposes of subpart C. The check will be returned, and notice
of nonpayment will be given, to the bank indorsing as depositary bank.
2. Because the depositary bank for Subpart B purposes will desire
prompt notice of nonpayment, its arrangement with the indorsing bank
should provide for prompt notice of nonpayment. The bank indorsing as
depositary bank may require the depositary bank to agree to take up the
check if the check is not paid even if the depositary bank's
indorsement does not appear on the check and it did not handle the
check. The arrangement between the banks may constitute an agreement
varying the effect of provisions of subpart C under
§ 229.37.
XXII. Section
229.36 Presentment and Issuance of Checks
A. 229.36(a) Payable Through and Payable at Checks
1. For purposes of subpart C, the regulation defines a
payable-through or payable-at bank (which would be designated the
collectible-through or collectible-at bank) as a paying bank. The
requirements of § 229.30(a) and the notice of nonpayment requirements
of § 229.33 are imposed on a
payable-through or payable-at bank and are based on the time of receipt
of the forward collection check by the payable-through or payable-at
bank. This provision is intended to speed the return of checks that are
payable through or at a bank to the depositary bank.
B. 229.36(b) Receipt at Bank Office or Processing Center
1. This paragraph seeks to facilitate efficient presentment of
checks to promote early return or notice of nonpayment to the
depositary bank and clarifies the law as to the effect of presentment
by routing number. This paragraph differs from § 229.32(a) because
presentment of checks differs from delivery of returned checks.
2. The paragraph specifies four locations at which the paying bank
must accept presentment of checks. Where the check is payable through a
bank and the check is sent to that bank, the payable-through bank is
the paying bank for purposes of this subpart, regardless of whether the
paying bank must present the check to another bank or to a nonbank
payor for payment.
a. Delivery of checks may be made, and presentment is considered to
occur, at a location (including a processing center) requested by the
paying bank. This is the way most checks are presented by banks today.
This provision adopts the common law rule of a number of legal
decisions that the processing center acts as the agent of the paying
bank to accept presentment and to begin the time for processing of the
check. (See also U.C.C. 4--204(c).) If a bank designates different
locations for the presentment of forward collection checks bearing
different routing numbers, for purposes of this paragraph it requests
presentment of checks bearing a particular routing number only at the
location designated for receipt of forward collection checks bearing
that routing number.
b. i. Delivery may be made at an office of the bank
associated with the routing number on the check. The office associated
with the routing number of a bank is found in American Bankers
Association Key to Routing Numbers, published by an agent of the
American Bankers Association, which lists a city and state address for
each routing number. Checks generally are handled by collecting banks
on the basis of the nine-digit routing number encoded in magnetic ink
(or on the basis of the fractional form routing number if the magnetic
ink characters are obliterated) on the check, rather than the printed
name or address. The definition of a paying bank in
§ 229.2(z) includes a bank
designated by routing number, whether or not there is a name on the
check, and whether or not any name is consistent
{{4-28-00 p.7418.97}}with the routing
number. Where a check is payable by one bank, but payable through
another, the routing number is that of a payable-through bank, not that
of the payor bank. As the payor bank has selected the payable-through
bank as the point through which presentment is to be made, it is proper
to treat the payable-through bank as the paying bank for purposes of
this section.
ii. There is no requirement in the regulation that the name and
address on the check agree with the address associated with the routing
number on the check. A bank generally may control the use of its
routing number, just as it does the use of its name. The address
associated with the routing number may be a processing center.
iii. In some cases, a paying bank may have several offices in the
city associated with the routing number. In such case, it would not be
reasonable or efficient to require the presenting bank to sort the
checks by more specific branch addresses that might be printed on the
checks, and to deliver the checks to each branch. A collecting bank
normally would deliver all checks to one location. In cases where
checks are delivered to a branch other than the branch on which they
may be drawn, computer and courier communication among branches should
permit the paying bank to determine quickly whether to pay the check.
c. If the check specifies the name of the paying bank but no
address, the bank must accept delivery at any office. Where delivery is
made by a person other than a bank, or where the routing number is not
readable, delivery will be made based on the name and address of the
paying bank on the check. If there is no address, delivery may be made
at any office of the paying bank. This provision is consistent with
U.C.C. 3--111, which states that presentment for payment may be made at
the place specified in the instrument, or, if there is none, at the
place of business of the party to pay. Thus, there is a trade-off for a
paying bank between specifying a particular address on a check to limit
locations of delivery, and simply stating the name of the bank to
encourage wider currency for the check.
d. If the check specifies the name and address of a branch or head
office, or other location (such as a processing center), the check may
be delivered by delivery to that office or other location. If the
address is too general to identify a particular office, delivery may be
made at any office consistent with the address. For example, if the
address is "San Francisco, California," each office in San
Francisco must accept presentment. The designation of an address on the
check generally is in the control of the paying bank.
3. This paragraph may affect U.C.C. 3--111 to the extent that the
U.C.C. requires presentment to occur at a place specified in the
instrument.
C. 229.36(c) Truncation
1. Truncation includes a variety of procedures in which the
physical check is held or delayed by the depositary or collecting bank,
and the information from the check is transmitted to the paying bank
electronically. Presentment takes place when the paying bank receives
the electronic transmission. This process has the potential to improve
the efficiency of check processing, and express provision for
truncation and electronic presentment is made in U.C.C. 4--110 and
4--406(b). This paragraph allows truncation by agreement with the
paying bank; however, such agreement may not prejudice the interests of
prior parties to the check. For example, a truncation agreement may not
extend the paying bank's time for return. Such an extension could
damage the depositary bank, which must make funds available to its
customers under mandatory availability schedules.
D. 229.36(d) Liability of Bank During Forward Collection
1. This paragraph makes settlement between banks during forward
collection final when made, subject to any deferment of credit, just as
settlements between banks during the return of checks are final. In
addition, this paragraph clarifies that this change does not affect the
liability scheme under U.C.C. 4--201 during forward collections of a
check. That U.C.C. section provides that, unless a contrary intent
clearly appears, a bank is an agent or subagent of the owner of a
check, but that Article 4 of the U.C.C. applies even though a bank may
have purchased an item and is the owner of it. This paragraph preserves
the
{{4-28-00 p.7418.98}}liability of a
collecting bank to prior collecting banks and the depositary bank's
customer for negligence during the forward collection of a check under
the U.C.C., even though this paragraph provides that settlement between
banks during forward collection is final rather than provisional.
Settlement by a paying bank is not considered to be final payment for
the purposes of U.C.C. 4--215(a)(2) or (3), because a paying bank has
the right to recover settlement from a returning or depositary bank to
which it returns a check under this subpart. Other provisions of the
U.C.C. not superseded by this subpart, such as section 4--202, also
continue to apply to the forward collection of a check and may apply to
the return of a check. (See definition of returning bank in
§ 229.2(cc).)
E. 229.36(e) Issuance of Payable Through Checks
1. If a bank arranges for checks payable by it to be payable
through another bank, it must require its customers to use checks that
contain conspicuously on their face the name, location, and first four
digits of the nine-digit routing number of the bank by which the check
is payable and the legend "payable through" followed by the name
and location of the payable-through bank. The first four digits of the
nine-digit routing number and the location of the bank by which the
check is payable must be associated with the same check processing
region. (This section does not affect § 229.36(b).) The required
information is deemed conspicuous if it is printed in a type size not
smaller than six-point type and if it is contained in the title plate,
which is located in the lower left quadrant of the check. The required
information may be conspicuous if it is located elsewhere on the check.
2. If a payable-through check does not meet the requirements of
this paragraph, the bank by which the check is payable may be liable to
the depositary bank or others as provided in § 229.38. For example, a
bank by which a payable-through check is payable could be liable to a
depositary bank that suffers a loss, such as lost interest or liability
under Subpart B, that would not have occurred had the check met the
requirements of this paragraph. Similarly, a bank may be liable under
§ 229.38 if a check payable by it that is not payable through another
bank is labeled as provided in this section. For example, a bank that
holds checking accounts and processes checks at a central location but
has widely-dispersed branches may be liable under this section if it
labels all of its checks as "payable through" a single branch and
includes the name, address, and four-digit routing symbol of another
branch. These checks would not be payable through another bank and
should not be labeled as payable-through checks. (All of a bank's
offices within the United States are considered part of the same bank;
see § 229.2(e).) In this example, the bank by which the checks are
payable could be liable to a depositary bank that suffers a loss, such
as lost interest or liability under Subpart B, due to the mislabeled
check. The bank by which the check is payable may be liable for
additional damages if it fails to act in good faith.
F. 229.36(f) Same-Day Settlement
1. This paragraph provides that, under certain conditions, a paying
bank must settle with a presenting bank for a check on the same day the
check is presented in order to avail itself of the ability to return
the check on its next banking day under U.C.C. 4--301 and 4--302. This
paragraph does not apply to checks presented for immediate payment over
the counter. Settling for a check under this paragraph does not
constitute final payment of the check under the U.C.C. This paragraph
does not supersede or limit the rules governing collection and return
of checks through Federal Reserve banks that are contained in subpart A
of Regulation J (12 CFR part 210).
2. Presentment requirements.
a. Location and time.
i. For presented checks to qualify for mandatory same-day
settlement, information accompanying the checks must indicate that
presentment is being made under this paragraph--e.g. "these checks
are being presented for same-day settlement"--and must include a
demand for payment of the total amount of the checks together with
appropriate payment instructions in order to enable the paying bank to
discharge its settlement
{{4-28-00 p.7418.99}}responsibilities
under this paragraph. In addition, the check or checks must be
presented at a location designated by the paying bank for receipt of
checks for same-day settlement by 8:00 a.m. local time of that
location. The designated presentment location must be a location at
which the paying bank would be considered to have received a check
under § 229.36(b). The paying bank may not designate a location
solely for presentment of checks subject to settlement under this
paragraph; by designating a location for the purposes of § 229.36(f),
the paying bank agrees to accept checks at that location for the
purposes of § 229.36(b).
ii. The designated presentment location also must be within the
check processing region consistent with the nine-digit routing number
encoded in magnetic ink on the check. A paying bank that uses more
than one routing number associated with a single check processing
region may designate, for purposes of this paragraph, one or more
locations in that check processing region at which checks will be
accepted, but the paying bank must accept any checks with a routing
number associated with that check processing region at each designated
location. A paying bank may designate a presentment location for
traveler's checks with an 8000-series routing number anywhere in the
country because these traveler's checks are not associated with any
check processing region. The paying bank, however, must accept at that
presentment location any other checks for which it is paying bank that
have a routing number consistent with the check processing region of
that location.
iii. If the paying bank does not designate a presentment location,
it must accept presentment for same-day settlement at any location
identified in § 229.36(b), i.e., at an address of the bank associated
with the routing number on the check, at any branch or head office if
the bank is identified on the check by name without address, or at a
branch, head office, or other location consistent with the name and
address of the bank on the check if the bank is identified on the check
by name and address. A paying bank and a presenting bank may agree that
checks will be accepted for same-day settlement at an alternative
location (e.g., at an intercept processor located in a different check
processing region) or that the cut-off time for same-day settlement be
earlier or later than 8:00 a.m. local time.
iv. In the case of a check payable through a bank but payable by
another bank, this paragraph does not authorize direct presentment to
the bank by which the check is payable. The requirements of same-day
settlement under this paragraph would apply to a payable-through or
payable-at bank to which the check is sent for payment or collection.
b. Reasonable delivery requirements. A check is considered
presented when it is delivered to and payment is demanded at a location
specified in paragraph (f)(1). Ordinarily, a presenting bank will find
it necessary to contact the paying bank to determine the appropriate
presentment location and any delivery instructions. Further, because
presentment might not take place during the paying bank's banking day,
a paying bank may establish reasonable delivery requirements to
safeguard the checks presented, such as use of a night depository. If a
presenting bank fails to follow reasonable delivery requirements
established by the paying bank, it runs the risk that it will not have
presented the checks. However, if no reasonable delivery requirements
are established or if the paying bank does not make provisions for
accepting delivery of checks during its non-business hours, leaving the
checks at the presentment location constitutes effective presentment.
c. Sorting of checks. A paying bank may require that checks
presented to it for same-day settlement be sorted separately from other
forward collection checks it receives as a collecting bank or returned
checks it receives as a returning or depositary bank. For example, if a
bank provides correspondent check collection services and receives
unsorted checks from a respondent bank that include checks for which it
is the paying bank and that would otherwise meet the requirements for
same-day settlement under this section, the collecting bank need not
make settlement in accordance with paragraph (f)(2). If the collecting
bank receives sorted checks from its respondent bank, consisting only
of checks for which the collecting bank is the paying bank and that
meet the requirements for same-day settlement under this paragraph, the
collecting bank may not charge a fee for handling those checks and must
make settlement in accordance with this paragraph.
{{4-28-00 p.7418.100}}
3. Settlement
a. If a bank presents a check in accordance with the time and
location requirements for presentment under paragraph (f)(1), the
paying bank either must settle for the check on the business day
it receives the check without charging a presentment fee or return the
check prior to the time for settlement. (This return deadline is
subject to extension under
§ 229.30(c). The settlement
must be in the form of a credit to an account designated by the
presenting bank at a Federal Reserve bank (e.g., a Fedwire transfer).
The presenting bank may agree with the paying bank to accept settlement
in another form (e.g., credit to an account of the presenting bank at
the paying bank or debit to an account of the paying bank at the
presenting bank). The settlement must occur by the close of Fedwire on
the business day the check is received by the paying bank. Under the
provisions of § 229.34(c), a
settlement owed to a presenting bank may be set off by adjustments for
previous settlements with the presenting bank. (See also
§ 229.39(d).)
b. Checks that are presented after the 8 a.m. (local time)
presentment deadline for same-day settlement and before the paying
bank's cut-off hour are treated as if they were presented under other
applicable law and settled for or returned accordingly. However, for
purposes of settlement only, the presenting bank may require the paying
bank to treat such checks as presented for same-day settlement on the
next business day in lieu of accepting settlement by cash or other
means on the business day the checks are presented to the paying bank.
Checks presented after the paying bank's cut-off hour or on
non-business days, but otherwise in accordance with this paragraph, are
considered presented for same-day settlement on the next business day.
4. Closed Paying Bank
a. There may be certain business days that are not banking days for
the paying bank. Some paying banks may continue to settle for checks
presented on these days (e.g., by opening their back office operations
or by using an intercept processor). In other cases, a paying bank may
be unable to settle for checks presented on a day it is closed.
If the paying bank closes on a business day and checks are presented
to the paying bank in accordance with paragraph (f)(1), the paying bank
is accountable for the checks unless it settles for or returns the
checks by the close of Fedwire on its next banking day. In addition,
checks presented on a business day on which the paying bank is closed
are considered received on the paying bank's next banking day for
purposes of the U.C.C. midnight deadline (U.C.C. 4--301 and 4--302) and
this regulation's expeditious return and notice of nonpayment
provisions.
b. If the paying bank is closed on a business day voluntarily, the
paying bank must pay interest compensation, as defined in
§ 229.2(oo), to the presenting bank for the value of the float
associated with the check from the day of the voluntary closing until
the day of settlement. Interest compensation is not required in the
case of an involuntary closing on a business day, such as a closing
required by state law. In addition, if the paying bank is closed on a
business day due to emergency conditions, settlement delays and
interest compensation may be excused under § 229.38(e) or U.C.C.
4--109(b).
5. Good faith. Under
§ 229.38(a), both presenting
banks and paying banks are held to a standard of good faith, defined in
§ 229.2(nn) to mean honesty
in fact and the observance of reasonable commercial standards of fair
dealing. For example, designating a presentment location or changing
presentment locations for the primary purpose of discouraging banks
from presenting checks for same-day settlement might not be considered
good faith on the part of the paying bank. Similarly, presenting a
large volume of checks without prior notice could be viewed as not
meeting reasonable commercial standards of fair dealing and therefore
may not constitute presentment in good faith. In addition, if banks, in
the general course of business, regularly agree to certain practices
related to same-day settlement, it might not be considered consistent
with reasonable commercial standards of fair dealing, and therefore
might not be considered good faith, for a bank to refuse to agree to
those practices if agreeing would not cause it harm.
6. U.C.C. sections affected. This paragraph directly affects the
following provisions of the U.C.C. and may affect other sections or
provisions:
{{8-31-04 p.7418.101}}
a. Section 4--204(b)(1), in that a presenting bank may not send a
check for same-day settlement directly to the paying bank, if the
paying bank designates a different location in accordance with
paragraph (f)(1).
b. Section 4--213(a), in that the medium of settlement for checks
presented under this paragraph is limited to a credit to an account at
a Federal Reserve bank and that, for checks presented after the
deadline for same-day settlement and before the paying bank's cut-off
hour, the presenting bank may require settlement on the next business
day in accordance with this paragraph rather than accept settlement on
the business day of presentment by cash.
c. Section 4--301(a), in that, to preserve the ability to exercise
deferred posting, the time limit specified in that section for
settlement or return by a paying back on the banking day a check is
received is superseded by the requirement to settle for checks
presented under this paragraph by the close of Fedwire.
d. Section 4--302(a), in that, to avoid accountability, the time
limit specified in that section for settlement or return by a paying
bank on the banking day a check is received is superseded by the
requirement to settle for checks presented under this paragraph by the
close of Fedwire.
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