The Fed Amends Reg CC – Warranties, Indemnities, and Remote Deposit Capture
Some of you may recall that in February 2014 the Federal Reserve Board issued a notice of proposed rulemaking to amend Regulation CC. Over three years later, on May 31, 2017 the Federal Reserve issued a final rule amending Regulation CC while simultaneously issuing another proposal on other issues. The finalized amendments will be effective on July 1, 2018. Other than some amendments and additions to the scope and definitions section, the changes largely impact Subpart C of the rule which addresses the collection of checks. The final rule is over 230 pages and we will address some more specifics in future blogs, but here's a high-level overview of some of the provisions.
Currently, Subpart C only applies to paper checks even though "by the beginning of 2017 the Federal Reserve Banks received over 99.99 percent of checks electronically." As a result, the scope of this subpart will be expanded to include electronic checks, here's the amended version of the scope of Reg CC:
229.1 Authority and purpose; organization
(3) Subpart C of this part contains rules to expedite the collection and return of checks and electronic checks by banks. These rules cover the direct return of checks and electronic checks, the manner in which the paying bank and returning banks must return checks and electronic checks to the depositary bank, notification of nonpayment by the paying bank, indorsement and presentment of checks and electronic checks, same-day settlement for certain checks, the liability of banks for failure to comply with subpart C of this part, and other matters.
One implication of this shift is that the amended section 229.34 of the rule will apply to "electronic checks" and "electronic returned checks" – as compared to the current rule. Now, not only will the rule apply to electronic items, but the rule will contain "indemnities" in addition to "warranties" and address remote deposit capture. Amended section 229.34 is very technical as shown in this redline. comparing the current and final rule. However, one item worth highlighting is the section relating to remote deposit capture that will be added to the rule:
(f) Remote deposit capture indemnity.
(1) The indemnity described in paragraph (f)(2) of this section is provided by a depositary bank that—
(i) Is a truncating bank under § 229.2(eee)(2) because it accepts deposit of an electronic image or other electronic information related to an original check;
(ii) Does not receive the original check;
(iii) Receives settlement or other consideration for an electronic check or substitute check related to the original check; and (iv) Does not receive a return of the check unpaid.
(2) A bank described in paragraph (f)(1) of this section shall indemnify, as set forth in § 229.34(i) [setting forth specific indemnity amounts], a depositary bank that accepts the original check for deposit for losses incurred by that depositary bank if the loss is due to the check having already been paid.
(3) A depositary bank may not make an indemnity claim under paragraph (f)(2) of this section if the original check it accepted for deposit bore a restrictive indorsement inconsistent with the means of deposit.
Reg CC is so technical, you might be thinking "what does that mean" – that was my first reaction. Here are some excerpts from the preamble to the rule which may help clarify this provision:
Finally, the Board proposed to add a new indemnity for remote deposit capture that would indemnify a depositary bank that received a deposit of an original paper check that was returned unpaid because the check was previously deposited using a remote deposit capture service and paid. Commenters expressed concern that as proposed, the indemnity would deter financial institutions from offering remote deposit capture service, thereby inhibiting its growth. Many of these commenters believed that the indemnity should not apply to checks bearing a restrictive indorsement.
The Board finds that basing the indemnity on whether the depositary bank that accepts the original check also offers remote deposit capture would not be an appropriate approach. The Board believes that the bank that accepts the original check should receive the indemnity, irrespective of whether that bank also offers remote deposit capture. As noted by many commenters, the bank that accepts a check via remote deposit capture is in the best position to address the actions of its own customer and to guard against the subsequent deposit of the paper check. The Board believes that this indemnity provides an appropriate incentive for the bank providing remote deposit capture services to take steps to minimize potential fraudulent deposits. The Board also believes that § 229.38(g) provides sufficient clarity that actions under this section must be brought within one year after the date of the occurrence of the violation involved.
Based on comments received, however, the Board has added an exception to the indemnity, and associated commentary, which would prevent a bank from making an indemnity claim if it accepted the original check containing a restrictive indorsement inconsistent with the means of deposit, such as “for mobile deposit only.” The Board believes that providing this exception may reduce accidental double deposits and may provide incentives for banks that receive remote deposit capture deposits to take steps to minimize intentionally fraudulent deposits.
NAFCU is still evaluating the rule and accompanying proposal for its impact on credit unions and will issue a Final Regulation and Regulatory Alert for members in coming weeks. In the meantime, for more information on the current state of play with Reg CC and RDC, check out this prior NAFCU blog post.