The Check That Keeps on Presenting Itself: Handling Represented Checks
Written by Jennifer Aguilar, Senior Regulatory Compliance Counsel
Check law. Everybody’s two favorite words, right? If you’re anything like me, you would really appreciate if all the check printers would find a new line of business and render checks extinct. Unfortunately, that doesn’t seem like it’s going to happen anytime in the near future. As much as consumers are turning to digital payments for their everyday purchases, businesses still rely heavily on checks and consumers are still using them to pay bills.
Since checks are still out there (*sigh*), the NAFCU Compliance Team continues to field various questions about checks. Most of these tend to be about fraud and liability (see this month’s Compliance Monitor for more on these topics), but we were recently asked about represented checks. Here’s the scenario:
A member presents a check to be deposited into their account. The credit union sends the check out for collection only for it to be returned for non-sufficient funds (NSF). Either in the normal course of business or at the member’s request, the check is sent through the process again, or “represented.”
If it’s returned NSF again, what do you do? Can you just keep representing it? For most credit unions, representment of items returned NSF is covered under Federal Reserve Operating Circular 3 and the NACHA rules. But, when these options have been exhausted, there is another potential solution.
Let’s start with the Federal Reserve. For credit unions using the Federal Reserve’s check collection services, Regulation J, Subpart A governs the collection of “cash items,” including checks. The Federal Reserve has also issued a number of Operating Circulars that further explain the rules for using the Federal Reserve’s services. You can think of these sort of like the commentary to the rules. Operating Circular 3 (OC 3) is the corresponding circular to Regulation J.
Generally, only “cash items” can be collected through the Federal Reserve. Section 3.1(a) of OC 3 explains that a “cash item” does not include any item that the paying bank has declined to pay two or more times. Here is the relevant section:
3.0 Items We Do Not Handle as Cash Items
3.1 A sender should not send to us any item, and we do not undertake to handle an item as a cash item, if:
a) The bank on which the item is drawn has declined to pay the item two or more times. For purposes of this subparagraph 3.1(a) only, the term “the item” means a check; any substitute check, electronic check, or ACH entry derived from that check; and any photocopy in lieu of that check;
In other words, if you represent a check that has come back NSF, that’s okay. However, if it comes back NSF a second time, the Federal Reserve will not accept it a third time as it no longer meets the definition of a cash item.
Article Two, Subsection 2.5.13 of NACHA’s rules also governs represented checks. It permits credit unions to represent a check as an ACH entry (the proper standard entry class code for a represented check is RCK) rather than go through the Federal Reserve’s check collection process. In order to qualify as an RCK, the rules require the item to:
- Be an “item,” as defined in Article 4 of the UCC;
- Be a negotiable demand draft drawn on a Participating Depository Financial Institution;
- Contain a pre-printed serial number;
- Be payable for less than $2,500;
- Indicate it was returned NSF;
- Be dated 180 days or less from the date the RCK Entry is transmitted;
- Be drawn on a consumer account; and
- Be previously presented, either:
- no more than two times through the check collection system; or
- no more than one time through the check collection system and no more than one time as an RCK Entry.
When read together, Operating Circular 3 and the NACHA rules limit the number of times a check can be presented to three:
- Twice through the check collection process and once through the ACH, or
- Once through the check collection process and twice through the ACH.
If you need to present the check four or more times, you’ll likely need to go directly to the paying bank for collection. As check collection between two financial institutions is governed by agreement, credit unions will want to review any private agreements to determine how many times it may present an item when it is doing so outside the Federal Reserve and ACH systems.