2018 Questions for Daily s

Transcription

1 2018 Questions for Daily s Question & Answer Format Listed by Dates 2018 NCP Exam Prep

2 National Check Payments Certification 2018 Program NCP Question of the Day s are sent to each 2018 NCP Exam registrant every business day in preparation for the annual exam. These ed questions and answers are intended to help familiarize the exam candidate with the reference materials used to create the exam as well as important topics influencing the check industry. Questions are strictly designed as a study aid and are not presented in the same multiple-choice format as the exam questions and do not contain the exact questions found on the NCP Exam. Copyright 2017 by the Electronic Check Clearing House Organization i.

3 National Check Payments Certification 2018 Program Preparing for the NCP Exam General Tips Plan now Set aside dedicated study time Read through the P.R.E.P. Guide more than once Complete all section quizzes in the guide Review answers and go back and look-up any missed answers Take the multiple-choice Sample Exam in the P.R.E.P. Guide o See Exhibit 14 in the 2018 Guide Review exam topics and resources NCP Blueprint lists categories of topics covered in the exam Exam resources can be found on the website at: Review these Question of the Day s Consider creating personal flash cards from the daily questions Questions can be used to prompt good daily study habit Consider an Exam Training class Training is offered by ECCHO s NCP Educational Partners May be instructor-led, webinars or in-person or on-demand recorded sessions For a complete list of NCP Educational Partners and links to available training offerings go to: NOTICE FOR INTERNAL USE ONLY This document could include technical inaccuracies or typographical errors and individual users are responsible for verifying any information found herein. Users should consult the actual text of laws, payment rules, standards or other reference materials when evaluating a particular question or issue. These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO TM. Copyright 2017 by the Electronic Check Clearing House Organization ii.

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5 Week 1: January 2 5 Jan. 2 What is the purpose of the Uniform Commercial Code? Page 1

6 Week 1: January 2 5 Jan. 2 What is the purpose of the Uniform Commercial Code? As outlined in the first article of the Uniform Commercial Code, the purpose and policies of the UCC are to: Simplify, clarify, and modernize the law governing commercial transactions Permit the continued expansion of commercial practices through custom, usage, and agreement of the parties Make uniform the law among the various jurisdictions. UCC is organized as articles each dealing with a different subject area Article 3 covers negotiable instruments Article 4 cover bank deposits Article 4A covers funds transfer Articles 3 and 4 of the UCC apply directly to uniform check law and work in combination with Federal Reserve regulations and operating circulars The Uniform Commercial Code does not have legal effect in a state or US territory unless UCC provisions are enacted by the individual legislatures as statutes Page 2

7 Week 1: January 2 5 Jan. 3 What do the provisions of Article 3 and Article 4 of the Uniform Commercial Code (UCC) cover? Page 3

8 Week 1: January 2 5 Jan. 3 What do the provisions of Article 3 and Article 4 of the Uniform Commercial Code (UCC) cover? U.C.C. - Article 3 - Negotiable Instruments Establishes the general duty standards for parties to act in good faith and exercise ordinary care; Deals with negotiable instruments such as checks, money orders or traveler s checks. Main provisions cover: Part 1. General Provisions and Definitions Part 2. Negotiation, Transfer, and Indorsement Part 3. Enforcement of Instruments Part 4. Liability of Parties Part 5. Dishonor Part 6. Discharge and Payment o For additional information, see reference at: UCC Article 3 U.C.C. - Article 4 Bank Deposits and Collections Deals with the responsibilities for the collection of items through Depositary, Collecting, and Payor Banks Main provisions cover: Part 1. General Provisions and Definitions Part 2. Collection of Items: Depositary and Collecting Banks Part 3. Collection of Items: Payor Banks. Part 4. Relationship Between Payor Bank and Its Customer Part 5. Collection of Documentary Drafts o For additional information, see reference at: UCC Article 4 Page 4

9 Week 1: January 2 5 Jan. 4 What is the purpose of Regulation CC? NOTE Updates to Regulation CC released in 2017 (eff. July 1, 2018) will not be in effect during the 2018 NCP Exam window and therefore are not addressed here for the 2018 NCP Exam. Related Question of the Day questions and answers are based solely on the currently effective version of the regulation. Page 5

10 Week 1: January 2 5 Jan. 4 What is the purpose of Regulation CC? Regulation CC states it s authority and purpose as follows: (a) Authority and purpose. This part is issued by the Board of Governors of the Federal Reserve System (Board) to implement the Expedited Funds Availability Act (12 U.S.C ) (the EFA Act) and the Check Clearing for the 21st Century Act (12 U.S.C ) (the Check 21 Act). Additional Information The regulation contains four subparts and six appendices. Subpart A: Definitions and administrative enforcement provisions Subpart B: Availability of Funds, Disclosure of Funds Availability Policies Jointly controlled by Federal Reserve Board and CFPB (Consumer Financial Protection Bureau) Key provisions include: o the duty of banks to make funds deposited into accounts available for withdrawal, including availability schedules o exceptions to the schedules o disclosure of funds availability policies o payment of interest o liability of banks for failure to comply with Subpart B Subpart C: Collection of Checks Requirements and specific warranties made by: o Paying Bank o Returning Bank o Depositary Bank Includes the following: o expeditious collection and return of checks by banks o the direct return of checks o the manner in which the paying bank and returning banks must return checks to the depositary bank o notification of nonpayment by the paying bank o indorsement and presentment of checks o same-day settlement for certain checks o the liability of banks for failure to comply with subpart Subpart D: Rules relating to substitute checks: the creation and legal status of substitute checks substitute check warranties and indemnity o expedited recredit procedures for resolving improper charges and warranty claims associated with substitute checks provided to consumers o disclosure and notices that banks must provide Page 6

11 Week 1: January 2 5 Jan. 5 What did the Check 21 Act do? Page 7

12 Week 1: January 2 5 Jan. 5 What did the Check 21 Act do? H.R. 1474, more commonly referred to as the Check 21 Act or Check 21, was intended to: Facilitate check truncation by authorizing substitute checks Foster innovation in the check collection system without mandating receipt of checks in electronic form Improve the overall efficiency of the Nation s payments system Mandated that all banks must accept substitute checks (paper items) Established that Check 21 supersedes any provision of state or Federal law, including the UCC, that is inconsistent with the Act, such as requiring the return of original checks to consumers in periodic account statements Created a new negotiable instrument, a substitute check, a paper reproduction of the original check that - Accurately represents all of the information on the front and back of the original item including the MICR line, Conforms to industry standards for substitute checks (ANS X ), and Must bear the legend: This is a legal copy of your check. You can use it the same way you would use the original check. Provided warranty criteria for substitute checks: Meets the legal equivalence requirements Not a duplicate of another paid item Provided indemnity criteria for substitute checks: Reconverting bank, and any subsequent banks handling a substitute check, indemnify for any losses incurred due to the receipt of a substitute check instead of the original Established provisions for expedited recredit: A substitute check was incorrectly charged to the account or there is a warranty breach from the substitute check The customer suffered a loss The original or better copy is required to determine the validity of the claim Outlined required evaluation and reporting from Federal agencies resulting from check truncation: Consumer funds availability improvements Economic and operational efficiencies Increase or decrease in check-related fraud losses Assessment of consumer acceptance Page 8

13 Week 1: January 2 5 Jan. 5 Additional Information The provisions of the Check 21 Act, as implemented by Regulation CC, provide legal recognition and equivalency of substitute checks. Additional agreements and/or rules are required for image exchanges. The Act does not govern electronic check image exchange, and therefore image exchanges should be performed under an agreement between the parties. See white paper located on the CheckImage Collaborative website entitled, The Role of Private Sector Rules and Federal Reserve System Rules in Check Image Exchange, (Feb 12, 2008) In summary it states check image rules establish the legal rights and obligations of financial institutions in connection with their forward and return check image exchanges Rules and other agreements are required to address operational and technical requirements to reduce risk to exchange participants and can allow the same or compatible rules to be applied to check image exchanges across multiple financial institutions and multiple exchange networks. Financial institutions that exchange check images without coverage under check image rules, or other agreements to address the unique legal issues associated with check image exchange, potentially expose the sending and receiving financial institutions to increased payment and operational risks. Page 9

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15 Week 2: January 8 12 Jan. 8 In the event of inconsistent rules or regulatory provisions, which check rules or regulations prevail? Page 11

16 Week 2: January 8 12 Jan. 8 In the event of inconsistent rules or regulatory provisions, which check rules or regulations prevail? In general, Federal law preempts state law in cases of inconsistency - Regulation CC The provisions of this subpart supersede any inconsistent provisions of the U.C.C. as adopted in any state, or of any other state law, but only to the extent of the inconsistency Regulation J (f) The provisions of this subpart supersede any inconsistent provisions of the Uniform Commercial Code, of any other state law, or of part 229 of this title (Regulation CC), but only to the extent of the inconsistency. Uniform Commercial Code (c) Regulations of the Board of Governors of the Federal Reserve System and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of this Article to the extent of the inconsistency Page 12

17 Week 2: January 8 12 Jan. 9 What options are available in the U.S. for image exchange rules coverage? Page 13

18 Week 2: January 8 12 Jan. 9 What options are available in the U.S. for image exchange rules coverage? Either Federal Reserve or Private Sector Rules (Clearing House or unique agreement) options exist for image exchange rules coverage in the U.S.: Federal Reserve Image Exchange Rules Operating Circular 3 (OC3) applies to the handling of all cash items accepted for forward collection and all returned checks accepted for return by the Federal Reserve Bank (FRB) o The Fed is itself a party to the sending and receiving of items under these rules o Incorporates Federal and state regulations (Reg J, Reg CC and UCC) regarding check processing, and o Includes any additional Reserve Bank provisions for Fed exchanges Private Sector Image Exchange Rules ECCHO Operating Rules and Commentary: Applies to the forward collection and/ or return of check images between ECCHO members that agree to exchange images under the ECCHO Rules o ECCHO is not a direct party to the exchange of items o Participation under Rules is voluntary, but once agreed must conform to Rules provisions o Incorporates Federal and State regulations (Reg CC and UCC) regarding check processing o May vary certain provisions by agreement between exchanging members Bi-lateral or Multi-lateral Agreements: Unique rules for exchanging images between two or more parties respectively, and outline specific areas of interest for that exchange o Agreements must be re-negotiated for each new relationship added outside of the bi- or multi-lateral exchanging parties Page 14

19 Week 2: January 8 12 Jan. 10 Does Check 21 provide legal rules or address check image exchanges between banks? Page 15

20 Week 2: January 8 12 Jan. 10 Does Check 21 provide legal rules or address check image exchanges between banks? No. The provisions of the Check 21 Act, as implemented by Regulation CC, provide legal recognition and equivalency of substitute checks. Additional agreements and/or rules are required for image exchanges. The Act does not govern electronic check image exchange, and therefore image exchanges should be performed under an agreement between the parties. Additional Information See white paper located on the CheckImage Collaborative website entitled, The Role of Private Sector Rules and Federal Reserve System Rules in Check Image Exchange, (Feb 12, 2008) In summary it states check image rules establish the legal rights and obligations of financial institutions in connection with their forward and return check image exchanges Rules and other agreements are required to address operational and technical requirements to reduce risk to exchange participants and can allow the same or compatible rules to be applied to check image exchanges across multiple financial institutions and multiple exchange networks. Financial institutions that exchange check images without coverage under check image rules, or other agreements to address the unique legal issues associated with check image exchange, potentially expose the sending and receiving financial institutions to increased payment and operational risks. Page 16

21 Week 2: January 8 12 Jan. 11 What role does the Federal Reserve play in the U.S. financial payments system? Page 17

22 Week 2: January 8 12 Jan. 11 What role does the Federal Reserve play in the U.S. financial payments system? The Federal Reserve has a mandate from Congress to promote an efficient nationwide payments system. Since 1987, the Reserve Board has Revamped the check-return system Improved presentment rights of private-sector banks Established rules governing Funds Availability Supported Check 21 to Congress o Substitute checks paved the way for technology improvements to speed check collection and reduce processing costs The twelve Federal Reserve Banks (FRBs) also provide banking services to depository institutions and to the federal government: For depository institutions, FRB s maintain accounts and provide services to o Collect checks and settle interbank payments o Electronically transfer funds o Distribute and receive currency and coin to meet the public s demand For the federal government, acts as fiscal agents to o Pay Treasury checks o Process electronic payments o Issues, transfers, and redeems U.S. government securities Page 18

23 Week 2: January 8 12 Jan. 12 What rules and regulations apply to items exchanged through the Federal Reserve? Page 19

24 Week 2: January 8 12 Jan. 12 What rules and regulations apply to items exchanged through the Federal Reserve? For the handling of all cash items accepted for forward collection and all returned checks accepted for return by the Federal Reserve, the following rules and regulations apply: Operating Circular No. 3 (OC3) Specific terms and conditions for handling items through the Federal Reserve o Additional detail to provisions established under Reg J The Fed is itself a party to the sending and receiving of items under these rules Incorporates federal and state regulations (Reg J, Reg CC and UCC) regarding check processing Regulation J (Reg J) Provides the legal framework for collecting checks and other items, and to settle balances through the Federal Reserve Establishes procedures, duties, and responsibilities among o Federal Reserve Banks o Senders and payors of checks and other items o Senders and recipients of Fedwire funds transfers Works in conjunction with federal and state regulations, and Federal Reserve operating circulars Regulation CC (Reg CC) Federal regulation which governs the availability of funds deposited in checking accounts and the collection and return of checks Uniform Commercial Code (UCC) Does not have legal effect in a state or US territory unless UCC provisions are enacted by the individual legislatures as statutes Articles 3 and 4 of the UCC apply directly to uniform check law and work in combination with Federal Reserve regulations and operating circulars o Article 3 deals with negotiable instruments such as checks, money orders or traveler s checks o Article 4 covers the bank deposits and collections Page 20

25 Week 3: January Jan. 16 According to the Federal Reserve Operating Circular No. 3 (OC3), what items are eligible for image exchange? Page 21

26 Week 3: January Jan. 16 According to the Federal Reserve Operating Circular No. 3 (OC3), what items are eligible for image exchange? The Federal Reserve Banks Operating Circular No. 3 (OC3) outlines eligibility for both paper and image cash letters in terms of cash items or non-cash items: The process of sending items via image exchange equates to sending an electronic item to the Federal Reserve, which Is an electronic image of an item and information describing that item that a Reserve Bank agrees to handle as a cash item; o Checks payable in a state of the U.S. (under of Regulation J *) o Government checks o Postal money orders Must conform to the Reserve Bank s technical requirements for processing electronic items; Must be data captured from a check, which by definition must be paper ; May be forward collection or return item * Section of Regulation J State means a State of the United States, the District of Columbia, Puerto Rico, or a territory, possession or dependency of the United States: - The Virgin Islands and Puerto Rico are deemed to be in the Second Federal Reserve District - Guam, American Samoa and the Northern Mariana Islands are deemed to be in the Twelfth Federal Reserve District Additional Information According to OC3, section 7.3, an image cash letter or image return letter sent to the Reserve Bank may not include an electronic item derived from: Items in carrier envelopes Food coupons Foreign items Photocopies of missing or destroyed items Notices in lieu of return Page 22

27 Week 3: January Jan. 17 According to the ECCHO Rules, what items are eligible for image exchange? Page 23

28 Week 3: January Jan. 17 According to the ECCHO Rules, what items are eligible for image exchange? ECCHO Rules, Section XIX (C) outlines image eligibility as follows: Item is defined as a check under 229.2(k) of Regulation CC; Item is a Fully Qualified Item; and Sending Bank and the Receiving Bank have entered into an agreement and the item is eligible for imaging under that agreement. Additional Information ECCHO considerations for item image eligibility: Sending Bank and Receiving Bank may, under their image exchange agreement, permit the exchange of images of items that are not Fully Qualified Partial MICR permitted by agreement; defined as o As-read MICR: MICR line information obtained from automated scanning or reading of check (paper or image) without repair, modification, or manual keying of MICR line information Allowable characters for As-Read MICR Information - numeric and special symbols allowable in MICR line information under applicable industry standards o RNA (Routing Number and Amount) Include all information from routing number and dollar amount fields o Do not include other character (numeric or otherwise) not contained in MICR line of Related Physical Check An item in a carrier is eligible for imaging if both: Front and back of the item are visible through the carrier o Carrier qualifies for handling by automated check processing equipment Item otherwise meets the requirements for item eligibility in Section XIX of the Rules If the carrier is encoded, the carrier, and not the item, must be fully qualified in compliance with the ECCHO Rules Page 24

29 Week 3: January Jan. 18 What provisions are included in the predominant image exchange rules to address the exchange of images of savings bonds? Page 25

30 Week 3: January Jan. 18 What provisions are included in the predominant image exchange rules to address the exchange of images of savings bonds? Federal Reserve OC3: Requirements associated with bonds deposited electronically FRB makes no warranties with respect to savings bonds processed Must have a completed agreement on file o New agreement required for separately sorted ICL deposits; No new agreement needed for savings bonds included in a mixed ICL Files must conform to ANSI X and UCD requirements Savings bonds can be deposited in forward cash letters only o No Return cash letter types will be supported MICR line requirements: o With preprinted MICR line: Must contain full MICR line in Type 25 item detail record o Without preprinted MICR line: Only routing number for savings bonds and the redemption amount in Type 25 item detail record are required Physical endorsements are not required o Electronic endorsements in Type 26 or Type 28 records required, consistent with check image deposit guidelines Physical amount encoding is not required Pricing Error Adjustment (PEA) o FRB provides immediate credit, subject to payment and adjustment o PEA adjustment is result of Bureau of the Fiscal Service (Fiscal Service) identification of difference between redemption amount it calculates and amount it was charged for the bond ECCHO Rules: Provides agreement to transmit images of savings bonds between Members with exclusions o Bonds do not meet requirements for image eligibility under Rules Rule establishes general standard of care applicable to handling Savings Bond similar to typical correspondent bank arrangements Comingling of images of savings bonds and checks allowed Industry Formats and Standards for Data File: o Must follow specifications set forth in Fed Quick Reference Guide Bank may reject and return image of Bond for any reason prior to payment by Fed Payment subject to correction and adjustment from Treasury or Federal Reserve Bank (as fiscal agent to US Treasury) o Sending Bank responsible for full amount of rejected, returned image, correction or adjustment Required use of adjustment process Page 26

31 Week 3: January Jan. 18 o Receiving Bank will send adjustment claim with entry to Sending Bank that originally sent image to the Receiving Bank Additional Information Treasury Requirements: Exchange of bonds are subject to regulations and guidelines of the Bureau of the Fiscal Service Paying Agent Stamp: Financial institution that is the Paying Agent must apply paying agent stamp to the front of the savings bond prior to imaging o Should not interfere with any of the information in the MICR line or with serial number reflected on the front of the savings bond Retention and Destruction: Paying agents must retain paper savings bond for at least 30 calendar days following the date that the ICL containing the paid savings bond was submitted to the FRB o Paper savings bonds must be stored in a secured location with physical, procedural and systemic controls in place o At the end of the retention period, paper savings bonds must be destroyed in a manner that adequately destroys any personally identifiable information (PII) beyond recognition and reconstruction For additional details, refer to: See Federal Reserve Operating Circular 3 (OC3) - Appendix C: Redeemed Savings Bonds and Savings Notes; and ECCHO Operating Rules Section XVII: Transmission of Images of Savings Bonds for Redemption by U.S. Treasury Department Page 27

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33 Week 3: January Jan. 19 What is the purpose of the provisions of the ECCHO Adjustment Rules and related Adjustment Matrix? Page 29

34 Week 3: January Jan. 19 What is the purpose of the provisions of the ECCHO Adjustment Rules and related Adjustment Matrix? The ECCHO Rules, Section XII and the related Adjustment Matrix set forth the processes and procedures for ECCHO members to make adjustment claims Adjustment rules provisions are in Section XII of the ECCHO Operating Rules Rules state members must comply with requirements of Adjustment Matrix for: Type of Adjustment Timing for claims Dollar threshold amount (if any) Documentation or other requirements Members may make Claim directly or through Provider Adjustments may come from: Forward or return item exchanged under the ECCHO Rules; or From items exchanged outside ECCHO Rules but members agree to adjust under the Rules Other provisions include notification of Sending Member and settlement and related timing In general, ECCHO members agree to a settlement process or use that of a provider Timing considerations: o "With entry" claims: By close of banking day following banking day claim was received o "Without entry" claims: By agreement of members or as established by provide Page 30

35 Week 4: January Jan. 22 What Rules and/or Regulations provide oversight for checks converted to ACH? Page 31

36 Week 4: January Jan. 22 What Rules and/or Regulations provide oversight for checks converted to ACH? It depends on the Standard Entry Class code (SEC code), but will generally be the NACHA rules which provide the legal framework for moving transactions through the ACH system. The NACHA operating rules and guidelines include provisions for: Responsibilities, liabilities, and warranties of participants Availability of funds for converted check transactions Return timeframes for converted check transactions Regulation E (Reg E) Provides protection for consumers whose accounts are debited or credited via ACH: Initiated through an electronic terminal or telephone For the purpose of ordering, instructing, or authorizing a financial institution to debit or credit an account Examples: Each of the following check conversion SEC codes, when initiated as paper checks then converted to ACH entries for payment and clearing, are no longer bound by the laws governing check payments: Accounts Receivable Entry (ARC) Point-of-Purchase Entry (POP) Back Office Conversion Entry (BOC) Example of check conversion to ACH where check regulations would still apply: Re-presented Check Entry (RCK) Originated as a check, has been dishonored and is re-presented via ACH network Continues to be treated as a check transaction even though processed as ACH transaction Regulation CC, Uniform Commercial Code, and ACH Rules apply but not Reg E Page 32

37 Week 4: January Jan. 23 When converting a check to an ARC, POP, or BOC transaction, what are the authorization requirements? Page 33

38 Week 4: January Jan. 23 When converting a check to an ARC, POP, or BOC transaction, what are the authorization requirements? Authorization Requirements: ARC: Notice must be provided to Receiver POP: Authorization must be on the receipt signed at time of purchase BOC: Signage & written notice at time of payment Example: At the check-out or where check is presented as source document to the Originator Additional Information Other SEC codes and related Authorization Requirements; RCK: Signage or written notice at time of payment XCK: ODFI warrants it has the necessary authority to initiate the XCK entry. For additional information, see the NACHA rules or NCP P.R.E.P. Guide, Exhibit 4 ACH Check Conversion and Selected SEC Codes Overview Page 34

39 Week 4: January Jan. 24 How does Regulation CC define a check? Page 35

40 Week 4: January Jan. 24 How does Regulation CC define a check? Regulation CC (k) defines a check as A negotiable demand draft drawn on or payable through or at an office of a bank; A negotiable demand draft drawn on a Federal Reserve Bank or a Federal Home Loan Bank; A negotiable demand draft drawn on the Treasury of the United States; A demand draft drawn on a state government or unit of general local government that is not payable through or at a bank; A United States Postal Service (USPS) money order; OR A traveler's check drawn on or payable through or at a bank AND is - Payable in U.S. funds Either an original or substitute check Additional Information: See Uniform Commercial Code (UCC) for negotiable instrument, draft and check definitions: UCC defines a negotiable instrument as a written order signed by the drawer or an unconditional promise to pay a fixed sum of money. Unconditional unless it states an express condition to payment Promise or order subject to, or governed by, another record; Rights or obligations with respect to promise or order stated in another record An instrument as defined by UCC is a draft if it is an order or a note if it is a promise Check definition found within the negotiable instrument definition see UCC [3-104(f)] Check: A draft payable on demand and drawn on a bank Includes cashier's check or teller's check even though described by another term (i.e. a money order ) Page 36

41 Week 4: January Jan. 25 What types of items must be given next-day availability? Page 37

42 Week 4: January Jan. 25 What types of items must be given next-day availability? Regulation CC states when deposits of various types must be made available to a bank s customers, measured in business days following the banking day on which the deposit is made: The following types of deposits must be made available on the first business day following the banking day of deposit ( next-day availability ): Cash Electronic payments (under other rules, funds for most electronic deposits are made available on the day of deposit) Check deposits made in person U.S. Postal Service Money Orders Checks drawn on the Federal Reserve State or local government checks Cashier s, certified, or teller s checks On-us checks Check deposits made in person or at a proprietary ATM U.S. Treasury checks deposited in an account held by a payee of the check Note: The first $200 (or the total amount of the deposit if it is less than $200) of non- next-day checks must be made available the next day. Page 38

43 Week 4: January Jan. 26 Under what conditions may a bank delay the availability of funds on deposited checks? Page 39

44 Week 4: January Jan. 26 Under what conditions may a bank delay the availability of funds on deposited checks? Regulation CC permits financial institutions to delay the availability of funds applied to a deposit under certain conditions for a reasonable period of time, which is generally outlined as: On-us checks - one additional business day (total of two business days) Non on-us checks - five additional business days (total of seven business days) Not eligible for extended holds: Deposited cash Electronic payments (deposits) Eligible for extended holds: Large deposits (greater than $5,000) First $5,000 of deposit is subject to the availability otherwise provided for checks Amount in excess of $5,000 may be held for an additional period of time Re-deposited checks May be held unless the check was returned because of missing indorsement or postdated check Deposits to accounts that are repeatedly overdrawn An account may be considered repeatedly overdrawn and items may be held if during the previous six months the account was negative as follows: o Six or more banking days o Two or more banking days in the amount of $5,000 or more Reasonable cause to doubt the collectability of a check May exist for postdated checks or checks that the paying institution has said it will not honor Checks deposited during emergency conditions Beyond the control of the financial institution such as natural disasters or communications malfunctions Deposits into accounts of new customers Accounts open less than 30 days o Next-day availability applies only to cash, electronic payments, and the first $5,000 of any other next-day items (e.g.; cashier's, certified, teller's, traveler's, and federal, state and local government checks) o Remaining amount from large deposit holds must be available by the ninth business day Page 40

45 Week 5: January 29 February 2 Jan. 29 What disclosures are required by Regulation CC? Page 41

46 Week 5: January 29 February 2 Jan. 29 What disclosures are required by Regulation CC? Section General disclosure requirements Requires that disclosures set forth under subpart B be written clearly and conspicuously and in a form that the customer can keep. Section Specific availability-policy disclosure Stipulates that a bank must provide disclosure statements describing its policy as to when funds deposited in an account are available for withdrawal. * Section Initial disclosures States banks must disclose their specific availability policies to potential customers prior to opening a new account. Section Additional disclosure requirements Requires banks to make certain disclosures: o On all preprinted deposit slips provided to customers o At all locations where bank employees accept consumer deposits o At automated teller machines (ATMs) o Upon request o When any changes are made to their policies Section Consumer awareness (Substitute Check) disclosures Requires banks make disclosure statements informing consumers o A substitute check is the legal equivalent of an original check o Recredit rights that apply when a substitute check was not properly charged to an account Page 42

47 Week 5: January 29 February 2 Jan. 30 According to Regulation CC, what does it mean to return an item expeditiously? Page 43

48 Week 5: January 29 February 2 Jan. 30 According to Regulation CC, what does it mean to return an item expeditiously? Regulation CC Paying Bank s responsibility for return of checks, requires the "expeditious" return of checks: A paying bank returns a check expeditiously if it: Returns the check to the depositary bank within two business days of presentment Sends the check in the same manner as it (or a similarly situated bank) would have sent the check for forward collection. Additional Information Once the Paying Bank makes the decision to dishonor and return the item, it must meet both return timings: UCC requirement to get the return out by the midnight deadline); and Regulation CC requirement to return the item in an expeditious manner Uniform Commercial Code (UCC) Article 4 ( 4-301): Paying Bank may return item before it has made final payment and before its midnight deadline, which is midnight on its next banking day following the banking day on which it received the relevant item, if the Paying Bank: Returns the item; or Returns an image of the item, by agreement and the image is returned in accordance with that agreement; or Provides notice of dishonor or nonpayment if the item is unavailable for return. Regulation CC Paying bank's responsibility for return of checks If paying bank determines not to pay a check, it shall return the check in an expeditious manner Paying bank returns a check in an expeditious manner if it sends the returned check in a manner such that the check would normally be received by the depositary bank not later than 4:00 p.m. (local time of the depositary bank) the second business day following the banking day on which the check was presented to the paying bank Page 44

49 Week 5: January 29 February 2 Jan. 31 What item(s) may be excluded from the Regulation CC expeditious return requirements? Page 45

50 Week 5: January 29 February 2 Jan. 31 What item(s) may be excluded from the Regulation CC expeditious return requirements? A Check drawn on the U.S. Treasury, a U.S. Postal Service money order or a check drawn on a state or unit of local government that is not payable through or at a bank These items would be excluded from the expeditious return, notice-of-nonpayment, and same-day settlement requirements See Regulation CC section Exclusions for details Page 46

51 Week 5: January 29 February 2 Feb. 1 What is a Remotely Created Check? Page 47

52 Week 5: January 29 February 2 Feb. 1 What is a Remotely Created Check? Regulation CC (fff) defined a remotely created check (RCC) as: Check that is not created by the paying bank and that does not bear a signature applied, or purported to be applied, by the person on whose account the check is drawn. Examples of uses for RCC s: A check authorized by a consumer over the telephone that is not created by the paying bank and bears a legend on the signature line, such as Authorized by Drawer, Credit card payment made over the phone today to avoid late charges Purchase made over the phone to a telemarketer by someone who doesn t have a credit card Compensate a merchant for the return of an initial paper check due to insufficient funds Page 48

53 Week 5: January 29 February 2 Feb. 2 What recourse does a consumer/ Paying Bank have for an unauthorized RCC? Page 49

54 Week 5: January 29 February 2 Feb. 2 What recourse does a consumer/ Paying Bank have for an unauthorized RCC? Consumer recourse for unauthorized Remotely Created Check (RCC): If identified within the bank's deadline for statement examination and the bank cannot verify that the customer actually authorized the charge, the customer is entitled to a refund. o Valid reason for consumer claims Depositor did not authorize the check o Invalid reasons for consumer claims Oral authorization obtained and recorded, the depositor forgot about it Charge was authorized, depositor is now experiencing "buyer's remorse" Paying Bank recourse for suspected unauthorized Remotely Created Check (RCC): If identified prior to its midnight deadline, may be returned per UCC If identified after its midnight deadline has passed: o May submit a breach of warranty claim per Reg CC that the item is not authorized Bank that transfers or presents a remotely created check and receives a settlement or other consideration warrants to the transferee bank, any subsequent collecting bank, and the paying bank that the person on whose account the remotely created check is drawn authorized the issuance of the check in the amount stated on the check and to the payee stated on the check. Within 30 days after the claimant has reason to know of the breach and the identity of the warranting bank Page 50

55 Week 6: February 5 9 Feb. 5 How does the Uniform Commercial Code define negotiable instruments? Page 51

56 Week 6: February 5 9 Feb. 5 How does the Uniform Commercial Code define negotiable instruments? The Uniform Commercial Code (UCC) Article 3, defines a negotiable instrument as a written promise or order to pay a specified amount of money, although interest may be added, to the person named on the instrument, or to the bearer of the instrument, on demand or at a fixed future time without the requirement for the person promising payment to perform any act in addition to paying the money specified Page 52

57 Week 6: February 5 9 Feb. 6 How does the UCC define the issue of an instrument? Page 53

58 Week 6: February 5 9 Feb. 6 How does the UCC define the issue of an instrument? The Uniform Commercial Code (UCC) Article 3, defines issue of an instrument as the first delivery of an instrument by the drawer, whether to a holder or nonholder, for the purpose of giving rights on the instrument to any person. Additional Information UCC provides the following additional information: An unissued instrument is binding on the drawer, but nonissuance is a defense An instrument that is conditionally issued or is issued for a special purpose is binding on the drawer, but failure of the condition or special purpose to be fulfilled is a defense The term "issuer" applies to the drawer of an issued or unissued instrument Page 54

59 Week 6: February 5 9 Feb. 7 In the case of an item written with differing courtesy and legal amounts, which amount is correct? Page 55

60 Week 6: February 5 9 Feb. 7 In the case of an item written with differing courtesy and legal amounts, which amount is correct? The legal amount - Amount written in words Additional Information Uniform Commercial Code (UCC) provides clarification on differing amounts on an item: If an item contains contradictory terms: Handwritten terms prevail over typewritten and printed terms Typewritten terms prevail over printed terms Words prevail over numbers Page 56

61 Week 6: February 5 9 Feb. 8 What does it mean to negotiate an item? Page 57

62 Week 6: February 5 9 Feb. 8 What does it mean to negotiate an item? Uniform Commercial Code (UCC) 3-201(a) defines negotiation as The transfer of possession of an instrument whether voluntary or involuntary By a person other than the issuer To a person who becomes a holder Requirements for negotiation of an instrument: Instrument payable to an identifiable person requires both: Transfer of possession of the instrument; AND Indorsement of the instrument by the holder Instrument payable to bearer: Transfer of possession alone Page 58

63 Week 6: February 5 9 Feb. 9 What is a properly payable item as defined in the UCC? Page 59

64 Week 6: February 5 9 Feb. 9 What is a properly payable item as defined in the UCC? The Uniform Commercial Code (UCC) Article states: An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank Additional Information: A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. However, the customer is not liable for the amount of an overdraft if the customer didn t sign the item or benefit from the proceeds of the item Page 60

65 Week 7: February Feb. 12 What is an Indorsement, how is one provided, and by whom? Page 61

66 Week 7: February Feb. 12 What is an Indorsement, how is one provided, and by whom? What is an Indorsement? Uniform Commercial Code (UCC) 3-204(a) defines indorsement as A signature that is made on an instrument for the purpose of negotiating the instrument How is one provided? Uniform Commercial Code (UCC) 3-401(b) indicates that a signature May be made manually or by means of a device or machine; and Includes a name or - if they are executed or adopted by a person with a present intention to authenticate a writing a word, mark or symbol By whom? The way a check is made payable will determine who must negotiate/indorse it. Checks may be payable to Bearer or to Order (UCC 3-109): Payable to Bearer - means the holder of the item can negotiate it Payable to Order means it is payable to an identified person and the identified person (or that person s representative) must indorse the item If payable to multiple parties (UCC 3-110(d) ) o Two or more parties with "and" in the middle, both must indorse it o Two or more parties with the names separated by "or" or "and/or", either party can indorse it Page 62

67 Week 7: February Feb. 13 What are different types of indorsements? Page 63

68 Week 7: February Feb. 13 What are different types of indorsements? Per the Uniform Commercial Code (UCC) Article 3, sections and 3-206, an identified person may indorse an instrument for the purposes of negotiating the instrument in the following ways: Special Indorsement Identifies the person to whom an instrument is payable Makes the instrument an Order instrument May only be negotiated by the identified person Blank Indorsement Does not identify a payee, is not a Special Indorsement Consists of only a signature Becomes a Bearer instrument May be converted into a Special Indorsement by writing, above the signature, words identifying the person to whom an instrument is payable Anomalous Indorsement Made by person who is not the holder of the instrument Does not affect the manner in which the instrument may be negotiated Restrictive Indorsement Restricts negotiability of the instrument words indicating payment is to be made: o For a particular account or to a particular bank For deposit only or For collection o To an agent for the benefit of the indorser or another person Does not prevent someone from becoming a holder in due course In order to become a holder in due course, the holder must o Take the item for value back to the indorser o Obey the restrictions on the indorsement Page 64

69 Week 7: February Feb. 14 What type of indorsement is a bank indorsement? Page 65

70 Week 7: February Feb. 14 What type of indorsement is a bank indorsement? Generally, the words pay any bank (or the like) make a bank indorsement a restrictive indorsement. The Uniform Commercial Code (UCC) Describes that a Collecting Bank plays the role of agent (or sub-agent) for the item s owner in the collection process regardless of the form, or lack of, indorsement Outlines that once an item has been indorsed pay any bank or the like, only a bank may acquire the rights of a Holder until the item has been either: o Returned to the customer who initiated collection o Specially indorsed by a bank to a person who is not a bank Regulation CC requires that banks Use a standard form of indorsement when indorsing checks during the forward collection and return process The indorsement standard: o Provides for indorsements by all collecting and returning banks o Includes a unique standard for depositary bank indorsements o Is designed to facilitate the identification of the depositary bank and the prompt return of checks o Places a duty on banks to ensure that their indorsements can be interpreted by any person o Specifies the information each indorsement must contain and its location and ink color Commentary to Regulation CC Protects the rights of a customer depositing a check in a bank without requiring the words pay any bank, as required by the UCC: o Use of this language in a depositary bank's indorsement will make it more difficult for other banks to identify the depositary bank o The indorsement standard [in the appendix to ] prohibits such material in subsequent collecting bank indorsements o The existence of a bank indorsement provides notice of the restrictive indorsement without any additional words Page 66

71 Week 7: February Feb. 15 What does the term holder mean with regard to check payments? Page 67

72 Week 7: February Feb. 15 What does term holder mean with regard to check payments? The definition can be found in UCC Article 1 (1-201) General Definitions: A holder means the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession Page 68

73 Week 7: February Feb. 16 What does Holder In Due Course mean? Page 69

74 Week 7: February Feb. 16 What does Holder In Due Course mean? As described in greater detail in UCC 3-302, a holder in due course is a holder who has possession of the check and that: Took the check in good faith, Took the check for value, Without notice it was overdue or dishonored Without notice the signature was unauthorized or altered Without knowledge of other claims against it Benefit of being a holder in due course (HIDC): Can enforce the check against drawer even if the check was returned unpaid by the drawee (Paying Bank) Additional Information Consider the difference between a Holder and a Holder In Due Course : ne becomes a holder of an instrument through negotiation; Bearer instrument the holder must have the instrument in his/ her possession Identified instrument the holder must be identified on the instrument and must have the instrument in his/ her possession To become a holder in due course, the holder must have possession of the instrument and have given value in exchange for the instrument meeting all the conditions listed above. Not every holder is a holder in due course. Page 70

75 Week 8: February Feb. 20 What is the Universal Companion Document (UCD) and what is its purpose? Page 71

76 Week 8: February Feb. 20 What is the Universal Companion Document (UCD) and what is its purpose? Universal Companion Document Was developed by the CheckImage Collaborative s Image Quality Work Group with input from a wide range of financial institutions as well as major image exchange providers. The UCD was designed to: Formalize an industry standard for check image exchange using the ANSI X standard format Establish a uniform industry approach for populating and validating check image files Not a standard but a companion document to the X standard Not intended to replace the ANSI X standard UCD clarifies how financial institutions should use the standard to ensure all necessary and appropriate payment data is exchanged between collecting and paying institutions Standard defines which records must be used for check image exchange (forward and return) and the UCD explains how to populate the fields in those records Outlines each record deemed to have critical payment data and lists all associated fields contained in the standard Describes any unique field validations for the following exchanges: o Endpoint Exchange o Federal Reserve o SVPCO o Viewpointe Additional Information UCD was released in 2016 as a new X9 technical report titled, X9 TR 47 Universal Companion Document Industry Adoption of X Free document available at Use of this document requires all image exchange participants obtain, use and adhere to the record and field usage definitions detailed in the ANS X standard For additional industry information and education about check image clearing including industry statistics and various white papers available at: Page 72

77 Week 8: February Feb. 21 How does the UCD require a bank to identify itself in a standard X9 image cash letter? Page 73

78 Week 8: February Feb. 21 How does the UCD require a bank to identify itself in a standard X9 image cash letter? There are two ways in which bank indorsements are carried in a standard X electronic file: Physical indorsements on check image contained in the Image View Data Record (Type 52) Electronic information carried in each item s related X9 records Forward item records: o Check Item Detail Record (Type 25) o Check Detail Addendum A Record (Type 26) o Check Detail Addendum C Record (Type 28) Return item records: o Return Record (Type 31) o Return Addendum A Record (Type 32) o Return Addendum B Record (Type 33) o Return Addendum D Record (Type 35) Additional Information The purpose of the Universal Companion Document (UCD) is to formalize an industry standard for check image exchange using the ANS X standard format and a compilation of industry best practices. It is not intended to replace the ANS X standard, but rather to clarify how financial institutions should use the standard to ensure all necessary and appropriate payment data is exchanged between collecting and paying institutions. Page 74

79 Week 8: February Feb. 22 What structural file processing requirements are outlined in the UCD (TR 47) for the ANS X image cash letter standard? Page 75

80 Week 8: February Feb. 22 What structural file processing requirements are outlined in the UCD (TR 47) for the ANS X image cash letter standard? UCD provides field validation requirements which are defined in the tables for each record Control Record errors or file corruption type errors will result in a file rejection Item record level errors will result in an item level reject and will be adjusted or returned as an administrative return using a defined value of 2 as the Return Reason Code Field level edit information is included in the tables for each record type The following lists structural requirements for ANS X image exchange files: Structural Requirements for File Processing Failure to meet processing requirements will result in file rejection, when: All Header Records DO NOT have a corresponding Control Record as shown: o File Header Record (Type 01) File Control Record (Type 99) o Cash Letter Header Record (Type 10) Cash Letter Control Record (Type 90) o Bundle Header Record (Type 20) Bundle Control Record (Type 70) All records are NOT properly sequenced in accordance with X o Addendum counts DO NOT correspond to the number of addendum records included o Item Counts or Dollar Amounts in Bundle, Cash Letter, and File Control Records fail to balance For more information, see the current Universal Companion Document (UCD) available on the CheckImage Collaborative website under Technical Resources. Additional Information Structural Requirements for Item Processing Failure to meet processing requirements will result in item level rejects, when Image View Detail Record (Type 50) DOES NOT have a corresponding Image View Data Record (Type 52). Check Detail Record (Type 25), DOES NOT have at least one Type 26 or Type 28 Addendum record. Return Record (Type 31) DOES NOT have at least one Type 32 and one Type 35 Addendum record (See Validation Table for exception when Returns Indicator (Field 14 in Record Type 10) has a defined value of E (Administrative). Page 76

81 Week 8: February Feb. 23 What information is contained in the forward collection records Types 25, 26 and 28 as defined by the ANS X image cash letter standard? Page 77

82 Week 8: February Feb. 23 What information is contained in the forward collection records Types 25, 26 and 28 as defined by the ANS X image cash letter standard? The ANS X standard defines these records as follows Check Detail Record (Type 25) The item one record for each check Contains the MICR line information of the check, the ECE Item Sequence Number and other indicators for processing For business-sized check, would carry aux-on us field Check Detail Addendum A Record (Type 26) Addendum record associated with previous Check Detail Record (Type 25) Typically referred to as the Bank of First Deposit (BOFD) indorsement record Contains the routing number of the item as the return location Multiple Type 26 records indicate multiple presentments of an item Check Detail Addendum C Record (Type 28) Addendum record associated with previous Check Detail Record (Type 25) o Typically referred to as Subsequent Indorsement record Two key purposes: o Contains the indorsement information for any institution handling the item subsequent to the depositary bank (BOFD) Each subsequent collecting bank will identify itself with an additional Type 28 record in addition to retaining all previous indorsement records Note: If a returns consolidator agreement is in place, would carry the depositary bank's indorsement with an indicator o Contains the Return Reason when flipped from a prior Type 35 record on a re-presented item; If the physical indorsement is not visible in the image, each item is required to have one Type 26 or Type 28 record. An item may have multiples of each record type in the case of multiple presentments and in the case of multiple subsequent indorsements To re-present items returned electronically, each item s Type 31, Type 32, Type 33 and Type 35 records will be retained in the Forward Presentment files corresponding Type 25, Type 26 and Type 28 records Page 78

83 Week 9: February 26 March 2 Feb. 26 What information is contained in the returned item record Types 31, 32, 33 and 35 as defined by the ANS X image cash letter standard? Page 79

84 Week 9: February 26 March 2 Feb. 26 What information is contained in the returned item record Types 31, 32, 33 and 35 as defined by the ANS X image cash letter standard? The ANS X standard defines these records as follows Return Record (Type 31) The return item - one record for each return Contains MICR line information of the check, the ECE Item Sequence Number, the current return reason code and other indicators for processing Corresponds to the associated Check Detail (Type 25) record o MICR Auxiliary On-Us field is not contained on this record (See Record Type 33) Return Addendum A Record (Type 32) Addendum record associated with Return Record (Type 31) Mirrors Check Detail Addendum A Record (Type 26) which identifies return location for customer returns; contains field values including: o o o Return location routing number Item sequence number (if present) Item business date May be multiple Type 32 records if there were multiple Type 26 records Return Addendum B Record (Type 33) Addendum record associated with Return Record (Type 31) Typically only present when the item has MICR Auxiliary On-Us field found in Check Detail Record (Type 25) on forward collection file Return Addendum D Record (Type 35) Addendum record associated with Return Record (Type 31) Record mirrors Check Detail Addendum C Record (Type 28) which identifies information for each subsequent endorsing institution o Returning bank will add an additional Type 35 record to the electronic history which includes the return reason code May be multiple Type 35 records if there were multiple Type 28 records Each item s data from the electronically presented Type 25, Type 26, and Type 28 forward exchange records will be retained in the Returned Item file s corresponding Type 31, Type 32, Type 33 and Type 35 records Page 80

85 Week 9: February 26 March 2 Feb. 26 Additional Information Current statutory (UCC) and regulatory (Reg CC) laws governing check payments do not list specific reasons for an item to be dishonored and returned The ANS X standard provides a list of return reasons and the associated codes that must be used for image exchange o Note: Return reason codes for images and IRDs previously listed in the annexes to both the X and X standards are removed in future releases of those documents o These codes are now listed in their own standard X standard Proper usage of these return reason codes has become standard industry practice Return reason codes are used in Return Record (Type 31) and Return Addendum D Record (Type 35) and the Return Reason may be carried on Check Detail Addendum C Record (Type 28) if it was associated with a previously returned and re-presented item A Paying Bank can return item for any reason as long as the return is within the legal return time frames UCC Paying Bank must return item by midnight of the banking day following presentment Reg CC Bank of First Deposit (BOFD) must receive the return by 4:00 p.m. local time two days after presentment Reg CC does not define reasons for returns However, Reg CC [ (d)] does place requirements on the Paying Bank to indicate on the face of a check it is returning that: o it is a return and o the reason for return For additional information on return codes and their usage, see the paper Proper Use Proper Use of Return Codes in Image Exchange on the CheckImage Central website. Page 81

86 Week 9: February 26 March 2 Feb. 26 Page Left Intentionally Blank Page 82

87 Week 9: February 26 March 2 Feb. 27 What is flipping in terms of records in an Image Cash letter file? Page 83

88 Week 9: February 26 March 2 Feb. 27 What is flipping in terms of records in an Image Cash letter file? Flipping is the process of transcribing the information in an X9 Image Cash Letter from the forward presentment Check Detail record types (20-series records) to the Return Item record types (30-series records). When an electronically presented item is returned The data from the item s electronically presented Type 25, Type 26 and Type 28 records will be retained in the Returned Item file s corresponding Type 31, Type 32, Type 33 and Type 35 records If the electronically returned item is then re-presented, the data from the item s Type 31, Type 32, Type 33 and Type 35 records will be retained in the Forward Presentment file s corresponding Type 25, Type 26 and Type 28 records Page 84

89 Week 9: February 26 March 2 Feb. 28 What does it mean to dishonor an item and what is Wrongful Dishonor? Page 85

90 Week 9: February 26 March 2 Feb. 28 What does it mean to dishonor an item and what is Wrongful Dishonor? The Uniform Commercial Code (UCC) Article 3, describes what it means to dishonor an item as when The Payor Bank returns a presented item by its midnight deadline either: Without paying or accepting the check; or Sends a timely notice of dishonor or non-payment The UCC Article 4, describes wrongful dishonor as when The Payor Bank dishonors either: A properly payable item; or An item that would create an overdraft and the bank had agreed to pay the overdraft Additional Information Per UCC Article 4, 4-402(c): A Payor Bank may make a determination at any time between when the item is received and when it returns the item or notice of non-payment The account balance only needs to be checked once If the bank re-determines the account balance, the later balance is the one used to determine whether an item is wrongfully dishonored Page 86

91 Week 9: February 26 March 2 Mar. 1 If a Paying Bank chooses to dishonor an item, how long does it have to return the item? Page 87

92 Week 9: February 26 March 2 Mar. 1 If a Paying Bank chooses to dishonor an item, how long does it have to return the item? According to the Uniform Commercial Code (UCC) Paying Bank may return an item, an image of the item, or send notice of dishonor by its midnight deadline, which is defined as Midnight on the next banking day following the banking day on which the item was received. Additional Information Once the Paying Bank makes the decision to dishonor and return the item, it must meet both return timings: UCC requirement to get the return out by the midnight deadline); and Regulation CC requirement to return the item in an expeditious manner Regulation CC, ( ) states Paying Bank s responsibility for return of checks, requires the "expeditious" return of checks: A paying bank returns a check expeditiously if it: o Returns the check to the depositary bank within two business days of presentment o Sends the check in the same manner as it (or a similarly situated bank) would have sent the check for forward collection. Page 88

93 Week 9: February 26 March 2 Mar. 2 When truncating and transmitting items electronically, how long must the item and associated information be retained? Page 89

94 Week 9: February 26 March 2 Mar. 2 When truncating and transmitting items electronically, how long must the item and associated information be retained? There are multiple rules and regulations which apply to the retention of paper checks and the retention of the associated electronic image and item data that have been truncated and transmitted via image exchange: Rules ECCHO Rules Allows the Sending Bank to determine a time period for the retention of original check based on internal bank policy. Refers retention of the electronic image and associated data to applicable law (see UCC below.) Federal Reserve Operating Circular 3 (OC3) Does not establish a document (or associated electronic image and item data) retention requirement. Regulations Uniform Commercial Code (UCC) outlines that items must either be retained or maintain the capacity to furnish legible copies of the items until the expiration of seven years after the receipt of the items. However, UCC adoption may vary by state and may impose different retention periods. Check 21 Act Does not itself impose any unique retention requirements but allows that a substitute check shall be the legal equivalent of the original check for all purposes including any state or federal law provisions. Any party providing a substitute check to meet a UCC requirement to provide the item or legible copy of the item must also retain images and all associated item information for the same seven-year retention period. Page 90

95 Week 10: March 5 9 Mar. 5 If an ineligible item is included in an Image Cash Letter, what is the process to reject that item back to the Sending Bank? Page 91

96 Week 10: March 5 9 Mar. 5 If an ineligible item is included in an Image Cash Letter, what is the process to reject that item back to the Sending Bank? The Receiving Bank would handle ineligible items in accordance with any agreement with the Sending Bank, the agreement or procedures of the exchange network through which the item was received, applicable check law, and/or other practice that the Receiving Bank has developed with the Sending Bank: Applicable laws: UCC Midnight Deadline Reg CC requirements for timely (expeditious) return Possible processes: Return image cash letter (ICLR) with administrative reason code Federal Reserve chargebacks Manual processes such as secure or fax Any other processes outlined in the agreement between the Sending and Receiving Banks Additional Administrative Reasons: Poor quality image Ineligible item Missing image Codeline mis-match Any others included in the agreement between the Sending and Receiving Banks Page 92

97 Week 10: March 5 9 Mar. 6 What is Presentment? Page 93

98 Week 10: March 5 9 Mar. 6 What is Presentment? The Uniform Commercial Code (UCC) Article 3, 3-501(a) defines presentment as: A demand for payment made to the drawee by or on behalf of a person entitled to enforce an instrument. Additional Information The following presentment considerations are subject to UCC Article 4, agreement of the parties, and clearing-house rules: Location for presentment Effective Presentment is made at the place of payment by any commercially reasonable means including: o Oral, written, or electronic communication (if electronic presentment authorized) Presentment occurs when demand for payment is received by the drawee Time of day Cut-off considerations Drawee may establish a cut-off hour for presentment o May treat items presented after cut-off hour as presented the next business day Provided to the Paying Bank The instrument is presented unless otherwise agreed by the parties, such as in agreements for electronic image exchange Indorsement Without dishonoring the instrument, the party to whom presentment is made may: o Return the item to the presenter for lack of a necessary indorsement; or o For failure to comply with the terms of the instrument, agreement of the parties, or other applicable law or rules Page 94

99 Week 10: March 5 9 Mar. 7 How many times may an item be presented for payment? Page 95

100 Week 10: March 5 9 Mar. 7 How many times may an item be presented for payment? An item may be presented two or three times depending on the rules under which the exchange occurred. Under the Federal Reserve s Operating Circular 3 (OC3), an item may be presented no more than two times (original presentment and one re-presentment) An item that has been presented a second time, if rejected, cannot be re-presented through the Fed Under the ECCHO Rules, an item may be presented not more than three times (original presentment and up to two re-presentments) Additional Information Federal Reserve Operating Circular 3 (OC3) Items We Do Not Handle As Cash Items 3.1 (f) A sender should not send to us any item if: 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(f) only, the term the item means a check; any substitute check, electronic item, or ACH entry derived from the check; and any photocopy in lieu of that check. ECCHO Rules Section XX. ELECTRONIC/IMAGE RETURNS XX (I). Resending of an Item. A Returnee Member that is the Depositary Bank that has received an Electronic/Image Return may re-present or resend to the Paying Bank: (1) the Related Physical Check, (2) an Electronic Image or (3) any other form or manner of the Related Physical Check outside of these Rules, no more than two times after the return of the Electronic/Image Return. Any other representment or resending of the or the Related Physical Check, an Electronic Image of such Related Physical Check or any other form or manner outside these Rules as either a check or an electronic funds transfer, is prohibited. Rules Commentary: Clarifies that it does not matter what format or manner the subsequent presentments or clearings of an item may take after the initial return of an Electronic/Image Return. The limitation on the total number of presentments or clearings under this Rule applies to all forms of the item including any substitute check, electronic image or record of the Related Physical Check, an ACH entry derived from the Related Physical Check or a photocopy in lieu of the Related Physical Check. Page 96

101 Week 10: March 5 9 Mar. 8 What are consequential damages? Page 97

102 Week 10: March 5 9 Mar. 8 What are consequential damages? Consequential damages is a term which refers to a monetary award as an outcome from a lawsuit brought which is based upon a sequence of events leading to an injury, not necessarily occurring directly and immediately from the initial act itself. For example: If a bank wrongfully dishonors a check, the customer on whose account the check is drawn may take action against the bank for actual damages resulting from the dishonored check (such as overdraft fees) and possibly consequential damages as well (such as impacts from cancelled services for which the check was intended to pay before it was dishonored). The Uniform Commercial Code (UCC) Article 4, 4-402(b) outlines the liability of a Payor Bank for wrongful dishonor as including Damages proximately caused by the wrongful dishonor (to be determined on a caseby-case basis) Actual damages proved May include damages for: o An arrest of the customer o Prosecution of the customer o Other consequential damages Page 98

103 Week 10: March 5 9 Mar. 9 What is a more common term for an item that is more than six months old? Page 99

104 Week 10: March 5 9 Mar. 9 What is a more common term for an item that is more than six months old? Stale dated refers to items more than six months old. Additional Information Uniform Commercial Code (UCC) outlines a bank s obligations regarding stale dated checks: BANK NOT OBLIGED TO PAY CHECK MORE THAN SIX MONTHS OLD A bank is under no obligation to a customer having a checking account to pay a check, other than a certified check, which is presented more than six months after its date, but it may charge its customer's account for a payment made thereafter in good faith. Regulation CC (Reg CC) referencing UCC includes the example of stale dated checks as one condition under which it may extend the time funds must be made available for withdrawal in (e)(2)(c) Reasonable Cause to Doubt Collectibility Page 100

105 Week 11: March Mar. 12 What is a customer s responsibility in detecting altered or counterfeit items on their account? Page 101

106 Week 11: March Mar. 12 What is a customer s responsibility in detecting altered or counterfeit items on their account? The Uniform Commercial Code (UCC) Article 4, outlines a customer s duty to discover and report unauthorized signature or altered items: A bank that has paid a check must send its customer either The item; or Information in the statement sufficient to allow the customer to identify the item (check number, amount and date the item paid) If a bank sends such a statement, the customer has a duty to examine it with reasonable promptness and must check to see if a paid item was unauthorized due to either An unauthorized signature (forgery or agent acting outside the scope of authority); or Alteration A customer must notify the bank within a reasonable time from when the statement or items were made available to the customer of any unauthorized payment in order to assert the alteration or unauthorized signature against the bank Promptness of reporting required of the customer is not specifically defined in UCC No specified definition in UCC of how many days constitutes reasonable promptness for purposes of the customer review May be case law in the states that address this question Additional Information: Two additional sections to consider in UCC CUSTOMER'S DUTY TO DISCOVER AND REPORT UNAUTHORIZED SIGNATURE OR ALTERATION (d): States that if the bank proves the customer failed to comply with the duties imposed by this section, the customer is precluded from asserting against the bank the customer's unauthorized signature or any alteration on the item if: (1), if the bank also proves that it suffered a loss by reason of the customer s failure to comply; and (2) the customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank if the payment was made before the bank received notice from the customer and after the customer had a reasonable period of time, not exceeding 30 days, in which to examine the item or statement and notify the bank. Note: The 30-day period only applies to the repeat check fraud rule (fraud by the same wrong-doer) Page 102

107 Week 11: March Mar (f) Without regard to care or lack of care of either the customer or the bank, a customer who does not within one year after the statement or items are made available discover and report unauthorized signature or alteration, they are precluded from asserting against the bank the unauthorized signature or alteration. This provision (f) is known as the Statute of Repose o The one year stated is the outside timing for customer to file a claim after the bank has provided the item, or statement describing the item, to the customer Page 103

108 Week 11: March Mar. 12 Page Left Intentionally Blank Page 104

109 Week 11: March Mar. 13 What is the time limit for a Stop Payment Order? Page 105

110 Week 11: March Mar. 13 What is the time limit for a Stop Payment Order? According to the Uniform Commercial Code (UCC) A customer (or anyone authorized if there is more than one person on the account) may stop payment on any item drawn on his/ her account or may close the account In order to stop payment or close the account, the customer must Order the bank to do so Describe the item or account with reasonable certainty Provide the order and description at a time and in a manner that affords the bank a reasonable opportunity to act on it A Stop Payment Order (SPO) will remain in effect for Written order 6 months Oral order 14 days unless confirmed in writing before the 14 days are over If renewed in writing, before the initial period is over, the order can be renewed for additional 6-month periods Page 106

111 Week 11: March Mar. 14 What is Declaration of Loss and when would it be used? Page 107

112 Week 11: March Mar. 14 What is a Declaration of Loss and when would it be used?? As defined in UCC 3-312, a Declaration of Loss is: A statement, made under penalty of perjury, that: Declarer lost possession of a check Declarer is the drawer or payee of the check (for a certified check) or the remitter or payee of the check (for cashier's check or teller's check) Loss of possession was not the result of a transfer by the declarer or a lawful seizure, and Declarer cannot reasonably obtain possession of the check (check was destroyed, lost, or stolen -- in the wrongful possession of an unknown person) If a cashier s check or teller s check is lost, stolen or destroyed, the remitter or payee may file a Declaration of Loss with the obligated bank with certain timing requirements: Must be filed timely to afford the obligated bank reasonable time to act on it, before the check is paid Then the claim becomes enforceable at the later of: o Date the claim is asserted; or o 90th day following the date of the cashier's check or teller's check Until the claim becomes enforceable, the obligated bank may pay the check or, in the case of a teller's check, may permit the drawee to pay the check Page 108

113 Week 11: March Mar. 15 Under what circumstances can a stop payment be placed on a cashier s check? Page 109

114 Week 11: March Mar. 15 Under what circumstances can a stop payment be placed on a cashier s check? Generally, a bank cannot place stop payment on a cashier s check or a teller s check as these are considered guaranteed obligations of the bank: Cashier s check: Check that a bank draws on itself; the bank is both drawer and drawee Signed by officer / employee of bank on behalf of the bank as drawer A direct obligation of the bank Teller s check: Check that is drawn by a bank on another bank Includes checks payable at or through a bank A direct obligation of the bank o Also checks drawn on a nonbank if check is payable through or at a bank Bank may also refuse payment under certain circumstances including: Alteration or forged endorsement Claim against the payee/presenter See UCC LOST, DESTROYED, OR STOLEN CASHIER'S CHECK, TELLER'S CHECK, OR CERTIFIED CHECK for additional details In general, a bank must be sure of the facts and circumstances prior to refusing payment on a guaranteed obligation as there can be penalties for wrongfully refusing to honor a cashier s or teller s check. UCC states the person with the right to enforce the check is entitled to: Compensation for expenses and loss of interest resulting from the nonpayment and may recover consequential damages if the obligated bank refuses to pay after receiving notice of particular circumstances giving rise to the damages o See UCC REFUSAL TO PAY CASHIER'S CHECKS, TELLER'S CHECKS, AND CERTIFIED CHECKS for additional information Page 110

115 Week 11: March Mar. 16 What warranties are outlined in the UCC? Page 111

116 Week 11: March Mar. 16 What warranties are outlined in the UCC? Section Warranty Application to Banks and/or Customers: and Transfer Warranties (Articles 3 and 4) Person or collecting bank that transfers an item warrants: (1) Entitled to enforce draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft; (2) All signatures on the item are authentic and authorized (3) Item has not been altered; and (4) Item is not subject to defense or claim (5) Warrantor has no knowledge of any insolvency proceeding commenced with respect to maker (6) For a remotely-created consumer item, person on whose account the item is drawn authorized item and amount for which it is drawn Transferees of an item Interbank and (a) Presentment Warranties (Articles 3 and 4) Person obtaining payment or acceptance, at the time of presentment, and previous transferor warrant (1) Entitled to enforce draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft; (2) Item has not been altered; and (3) Warrantor has no knowledge that signature of the purported drawer of the draft is unauthorized; and (4) For a remotely-created consumer item, person on whose account the item is drawn authorized item and amount for which it is drawn Interbank (b) Dishonored Item Warranties If an item is dishonored, the transferring person or bank is obligated to pay the amount due on the item According to the terms of the item at the time it was transferred Encoding and Retention Warranties (a) Person encoding information on item after issue warrants that the information is correctly encoded. If the customer of a depositary bank encodes, bank also makes the warranty (b) Person or bank agreeing to retain an item under an electronic presentment agreement ( 4-110) warrants that retention and presentment comply with that agreement Interbank Person who encodes item after issue Person who retains item Depositary bank of customer who encoded/ agreed to retain item Interbank Page 112

117 Week 12: March Mar. 19 What warranties are outlined in Regulation CC? Page 113

118 Week 12: March Mar. 19 What warranties are outlined in Regulation CC? 0B0BSection Warranty 2B2BApplication to Banks and/or Customers: 3B3B (a) Return Warranties Each paying bank or returning bank that transfers a returned check warrants to transferee returning bank, to any subsequent returning bank, depositary bank, and owner of the check, that: (1) Return is timely under UCC and Reg CC (2) Bank is authorized to return the check; (3) Check has not been materially altered; (4) In the case of a notice in lieu of return, the original check has not and will not be returned (b) Warranty of notice of nonpayment Paying bank warrants that: (1) Return is or will be timely under UCC and Reg CC (2) Bank is authorized to send notice; and (3) The check has not been materially altered 15B15BInterbank 16B16BOwner of the check 62B62B (a) (c) Warranty of settlement amount, encoding and offset: Bank that transfers or presents check warrants: (1) Total amount presented equals total amount requested for settlement (2) Accompanying information accurately indicates total amount of check transferred (3) Warrants that information encoded on check after issue is correct (d) Transfer and presentment warranties (Remotely Created Check): Transfer bank warrants that RCC item authorized in amount and payee stated on check Substitute Check Warranties Bank that transfers, presents, or returns a substitute check (or a paper or electronic representation of a substitute check) for which it receives consideration warrants that: (1) Substitute check meets requirements for legal equivalence [ (a)(1)-(2)]; and (2) No duplicate payment 25B25BInterbank only 30B30BInterbank 31B31BThe recipient of the substitute check 32B32BAny subsequent recipient of the substitute check Page 114

119 Week 12: March Mar. 20 If an item that has been truncated is presented multiple times for payment, what warranty or warranties violations have occurred? Page 115

120 Week 12: March Mar. 20 If an item that has been truncated is presented multiple times for payment, what warranty or warranties violations have occurred? Depending on the agreement between the Sending Bank and the Receiving Bank, the warranty against presenting an item multiple times is addressed as follows: ECCHO Rules, Section XIX(L)(7) for items exchanged under ECCHO Rules:...the Receiving Bank and any other person will not receive a transfer, presentment or return of, or otherwise be charged for, the Electronic Image, the Related Physical Check of that Electronic Image, or a paper or electronic representation of the Related Physical Check such that the person will be asked to make a payment based on an item that it already paid Regulation CC, (a)(2): No depositary bank, drawee, drawer, or indorser will receive presentment or return of, or otherwise be charged for, the substitute check, the original check, or a paper or electronic representation of the substitute check or original check such that that person will be asked to make a payment based on a check that it already has paid. Regulation J for items sent to or received from the Federal Reserve: 210.5: The sender warrants to each Reserve Bank handling the item that No person will receive a transfer, presentment, or return of, or otherwise be charged for, the electronic item, the original item, or a paper or electronic representation of the original item such that the person will be asked to make payment based on an item it already has paid : The Reserve Bank to a subsequent collecting bank and to the paying bank and any other payor that No person will receive a transfer, presentment, or return of, or otherwise be charged for, the electronic item, the original item, or a paper or electronic representation of the original item such that the person will be asked to make payment based on an item it already has paid. Page 116

121 Week 12: March Mar. 21 A Paying Bank determines the same check image was presented twice once from Bank A, which accepted the check via a mobile deposit, and once from Bank B, which accepted the physical check and presented an image of that check to the Paying Bank. What warranty was breached and what recourse does the Paying Bank have for a breach of warranty claim? Page 117

122 Week 12: March Mar. 21 A Paying Bank determines the same check image was presented twice once from Bank A, which accepted the check via a mobile deposit, and once from Bank B, which accepted the physical check and presented an image of that check to the Paying Bank. What warranty was breached and what recourse does the Paying Bank have for a breach of warranty claim? Scenario describes a no double-debit warranty or warranty against duplicate payments Similar warranty language can be found in the ECCHO Rules and in Regulation J for check images and in Regulation CC (Subpart D) for substitute checks No person will receive a transfer, presentment, or return of, or otherwise be charged for, the electronic item, the original item, or a paper or electronic representation of the original item such that the person will be asked to make payment based on an item it already has paid Paying Bank can make the breach of warranty claim to either Bank A or Bank B Both Bank A and Bank B made the same warranty against duplicate presentment on each check image that was presented Additional Information Similar warranties would apply whether the check images were presented under the ECCHO Rules of through a Federal Reserve Bank exchange Warranty against duplicate presentment is found in both sets of industry image exchange rules: ECCHO Rules: Section XIX (L)(7) (forward presentment); and XX (J)(4) (returns) Regulation J (as referenced by Federal Reserve OC3): Section (4)(ii) Regulation CC commentary also provides an example of the scenario above [ (a)(2)] which stipulates: Paying Bank could pursue a warranty claim for the loss it suffered as a result of the duplicative payment against either Bank A or Bank B While Regulation CC currently does not address check image exchange, the text of the ECCHO warranty against duplicate payment is substantially based on the text of this warranty Page 118

123 Week 12: March Mar. 22 What is the purpose of the FFIEC? Page 119

124 Week 12: March Mar. 22 What is the purpose of the FFIEC? The Federal Financial Institutions Examination Council (FFIEC) is a formal interagency body that makes recommendations to promote uniformity in the supervision of financial institutions. The FFIEC: Prescribes uniform principles, standards, and report forms for the federal examination of financial institutions Is empowered by: Board of Governors of the Federal Reserve System (FRB) Federal Deposit Insurance Corporation (FDIC) National Credit Union Administration (NCUA) Office of the Comptroller of the Currency (OCC), and Consumer Financial Protection Bureau (CFPB) In 2006, the State Liaison Committee (SLC) was added to the Council as a voting member - SLC includes representatives from: o Conference of State Bank Supervisors (CSBS) o American Council of State Savings Supervisors (ACSSS) o National Association of State Credit Union Supervisors (NASCUS) Page 120

125 Week 12: March Mar. 23 Acording to the FFIEC, what are six types of risk in a bank? Page 121

126 Week 12: March Mar. 23 According to the FFIEC, what are six types of risk in a bank? Strategic risk Associated with the financial institution's mission and future business plans for entering new business lines, expanding existing services through mergers and acquisitions, and enhancing infrastructure Credit Risk Arises when a party will not settle an obligation for full value Reputation Risk Occurs when negative publicity regarding an institution's business practices leads to a loss of revenue or litigation Operational Risk Risk of loss resulting from inadequate or failed internal processes, people and systems, or external events Liquidity Risk Current and potential risk to earnings or capital arising from a financial institution's inability to meet its obligations when they come due without incurring unacceptable losses Legal or Compliance Risk Arises from failure to comply with statutory or regulatory obligations, existing consumer protection statutes, regulations, and case law governing retail payment transactions For additional details, refer to: FFIEC Retail Payment Systems, IT Examination Handbook available at this link: Page 122

127 Week 13: March Mar. 26 What are BCPs and BIAs and why are both considered important? Page 123

128 Week 13: March Mar. 26 What are BCPs and BIAs and why are both considered important? According to the FFIEC: Business Continuity Plan (BCP) establishes the basis for financial institutions to recover and resume business processes when operations have been disrupted unexpectedly. Because financial institutions play a crucial role in the overall economy, disruptions in service should be minimized in order to maintain public trust and confidence in the financial system. Financial institution management should incorporate business continuity considerations into the overall design of their business model to proactively mitigate the risk of service disruptions. Business Impact Analysis (BIA) is the first step in the business continuity planning process and should include: Assessment and prioritization of all business functions and processes, including their interdependencies, as part of a work flow analysis; Identification of the potential impact of business disruptions resulting from uncontrolled, non-specific events on the institution's business functions and processes; Identification of the legal and regulatory requirements for the institution's business functions and processes; Estimation of maximum allowable downtime, as well as the acceptable level of losses, associated with the institution's business functions and processes; and Estimation of recovery time objectives (RTOs), recovery point objectives (RPOs), and recovery of the critical path. Page 124

129 Week 13: March Mar. 27 What information should be provided in a Business Continuity Plan and what is the recommended development process? Page 125

130 Week 13: March Mar. 27 What information should be provided in a Business Continuity Plan and what is the recommended development process? Business Continuity Planning involves the development of an enterprise-wide BCP and the prioritization of business objectives and critical operations that are essential for recovery in the event of disruption. Characteristics of an enterprise-wide BCP: Findings from a comprehensive BIA and risk assessment Documented in a written program and disseminated to financial institution employees Reviewed and approved by the board and senior management at least annually Specifics regarding the various events that could prompt implementation of the plan and the process for invoking the BCP Responsibilities and procedures to be followed by each continuity team Current contact lists of critical personnel Communication processes for internal and external stakeholders Relocation strategies to alternate facilities Procedures for approving unanticipated expenses Focused on the impact of various threats that could potentially disrupt operations rather than on specific events Four main steps in the BCP development process include: 1.) Business Impact Analysis (BIA): Identification of potential impact of uncontrolled nonspecific events on business functions and processes 2.) Risk Assessment: Analysis of threats based upon business impact and prioritization of potential disruptions based on severity 3.) Risk Management: Identification, assessment, and reduction of risk to an acceptable level; Development, implementation, and maintenance of a written, enterprise-wide BCP 4.) Risk Monitoring and Testing: Incorporate BIA and Risk Assessment findings into the BCP; Regular assessment and revision Page 126

131 Week 13: March Mar. 28 What are examples of potential disruptive events that could invoke a Business Continuity Plan? Page 127

132 Week 13: March Mar. 28 What are examples of potential disruptive events that could invoke a Business Continuity Plan? Potential disruptive events that may result in a BCP being invoked can include the following: Critical personnel are unavailable and/or cannot be contacted Critical buildings, facilities, or geographic regions are not accessible Hardware Issues o Equipment has malfunctioned or is destroyed Software Issues o Software and data are not accessible or are corrupted Third-party services are not available Utilities are not available o May include power, telecommunications, etc. Liquidity needs cannot be met Vital records are not available Page 128

133 Week 13: March Mar. 29 What is Remote Deposit Capture? Page 129

134 Week 13: March Mar. 29 What is Remote Deposit Capture? According to FFIEC RDC Guidance, Remote Deposit Capture (RDC): A deposit transaction delivery system that allows a financial institution to receive digital information from deposit documents captured at remote locations such as: Branches or other back office locations ATMs Domestic and foreign correspondents Customer locations Benefits of RDC include: New banking products/ revenue streams Improved availability Reduced processing costs Accelerated clearing Reduced return item risk Reduced transportation costs Page 130

135 Week 13: March Mar. 30 What should be included in a Risk Management plan for Remote Deposit Capture (RDC)? Page 131

136 Week 13: March Mar. 30 What should be included in a Risk Management plan for Remote Deposit Capture (RDC)? A Risk Management plan for Remote Deposit Capture should include: Risk Assessment to identify the related types and levels of risk exposure Comprehensive contracts and customer agreements that clearly identify the roles, responsibilities, and liabilities of all parties in the RDC process to minimize exposure to legal and compliance risks Appropriate technology and process controls implemented at both the financial institution and customer location(s) to address operational risk Risk measurement and monitoring systems implemented for both the financial institution and customer When appropriate and available, insurance coverage to transfer risk Additional Information According to the FFIEC Remote Deposit Capture Guidance Necessary elements of the RDC risk management process in an electronic environment generally will include principles of risk management applicable to financial institutions internal deployment of other forms of electronic deposit delivery systems such as Mobile banking Automated clearing house [ACH] check conversions Page 132

137 Week 14: April 2 6 Apr. 2 What provisions should be included in a customer agreement for Remote Deposit Capture (RDC)? Page 133

138 Week 14: April 2 6 Apr. 2 What provisions should be included in a customer agreement for Remote Deposit Capture (RDC)? According to FFIEC Remote Deposit Capture Guidance, customer contracts or agreements should include: Clear outline identifying the roles, responsibilities, and liabilities of all parties in the RDC process Appropriate technology and process controls implemented at both the financial institution and customer location(s) to address operational risk Handling and record retention procedures, including physical and logical security expectations Eligible items, processes/ procedures, performance standards Funds availability, collateral, collected funds requirements Imaged documents (or originals, if available) RDC customers must provide to facilitate investigations related to unusual transactions or poor quality transmissions, or to resolve disputes Periodic audits of the RDC process, including the IT infrastructure Governing laws, regulations, and rules Authority of the financial institution to mandate specific internal controls at the customer s locations, audit customer operations, or to terminate the RDC relationship Page 134

139 Week 14: April 2 6 Apr. 3 The FFIEC s Retail Payment Systems booklet includes guidance for what type of payments in the current Appendix E? Page 135

140 Week 14: April 2 6 Apr. 3 The FFIEC s Retail Payment Systems booklet includes guidance for what type of payments in the current Appendix E? Appendix E provides guidance for Mobile Financial Services FFIEC issued a revised Retail Payment Systems booklet in 2016 which included the addition of this new appendix Appendix E: Mobile Financial Services: Contains guidance for mobile financial services risk considerations including: Risk identification Risk measurement Risk mitigation Monitoring and reporting Supplements existing booklet guidance on other retail payment topics including: Electronic payments related to credit cards and debit cards Remote deposit capture Changes in technology of retail payment systems Additional Information Mobile financial services are products and services financial institutions provide to customers through mobile devices Customers may be less likely to activate security controls, virus protection, or personal firewall functionality on mobile devices Mobile financial systems can pose elevated risks related to: Device security Authentication Data and application security Data transmission security Compliance Third-party management Appendix E focuses on associated risks and emphasizes an enterprise-wide risk management approach to effectively manage and mitigate those risks Page 136

141 Week 14: April 2 6 Apr. 4 What are the common methods of capturing source document data? Page 137

142 Week 14: April 2 6 Apr. 4 What are the common methods of capturing source document data? Three common methods recognized by the FFIEC for capturing source document data for information systems are: Item MICR Capture - MICR encoded source documents, including checks and customer transaction tickets, are processed on machines which read the MICR encoding to capture the item information, converting it into formats that can be processed electronically Optical Character Recognition (OCR) System reads data from captured source documents that is printed or typed with a special type font. Handwriting recognition systems do not require a special type font to read and capture source document information, such as: o CAR (Courtesy Amount Recognition) reads and captures the amount information written in the courtesy box on a check o LAR (Legal Amount Recognition) reads and captures the amount information written on the legal line on a check o CAR and LAR are generally used together and function as a control to ensure a correct amount is applied to captured item information Direct Item Entry - Direct item entry involves manually entering data into systems. In these systems, users enter data from source documents directly into application files or onto magnetic media for subsequent capture and processing. Data sources can include teller terminals, ATMs, POS terminals, PCs, and items that are not MICR-encoded. Page 138

143 Week 14: April 2 6 Apr. 5 What does it mean to be Image Survivable? Page 139

144 Week 14: April 2 6 Apr. 5 What does it mean to be Image Survivable? Image Survivable refers to check security features designed to help reduce check fraud that do not become disabled during the imaging process, called Image-survivable Check Security Features (ICSF): Examples of traditional paper check security features rendered useless during the imaging process include: Chemical & thermal sensitive paper Paper printed with watermarks, embossing, or foils Holograms Paper with original document or other screens on the back of check VOID or other pantographs designed to appear on a photocopy Three types of Image Survivable Security Features: Bar-coding, seal-encoding, & digital watermarks o Encrypt check payment data (such as the payee, check number, account number, and/or amount) into a printed security mark on the check o Special software is needed to decode the security mark to verify check image Typically used on checks when payment data is known at the time of printing, such as corporate account checks Page 140

145 Week 14: April 2 6 Apr. 6 What liability is shifted from a bank that uses a Third Party processor? Page 141

146 Week 14: April 2 6 Apr. 6 What liability is shifted from a bank that uses a Third Party processor? No liability shifts from a bank to a Third Party processor that is operating on behalf of the bank. For exchanges under the ECCHO Rules, Section IV outlines that A Member utilizing a Third Party Agent remains responsible for all of that Member s obligations prescribed in this these Rules. Each act or omission of the Third Party Agent shall for purposes of the Rules be deemed to be an act or omission of the Member on whose behalf the Third Party Agent was acting. The FFIEC recommends that agreements with Third Party processors should include Comprehensive contract provisions and adequate due diligence processes Provisions for monitoring service level agreements, including the review of select retail payment transaction items to ensure they are accurate and processed timely Defined terms of acceptable access and potential liabilities in the event of fraud or processing errors Page 142

147 Week 15: April 9 13 Apr. 9 What does Straight Through Processing mean and why is it important? Page 143

148 Week 15: April 9 13 Apr. 9 What does Straight Through Processing mean and why is it important? Straight Through Processing (STP) is the ability to receive and process transactions end-to-end utilizing an electronic and automated system without intervention. Nearly all banks have implemented some form of image technology in place of traditional paper processes Business case benefits associated with STP include: Elimination of possible processing delays due to inefficient and/or manual operation Acceleration of clearing by reducing the amount of time spent processing transactions Minimized operational errors by reducing or eliminating the number of touch-points and exception processes Reduction of transaction processing costs associated with staff, inefficient manual operations Page 144

149 Week 15: April 9 13 Apr. 10 What are examples of poor image quality? Page 145

150 Week 15: April 9 13 Apr. 10 What are examples of poor image quality? Common image quality defects can include the following: Too light - Image not having a sufficient number of black pixels or sufficient contrast Too dark - Image having too many black pixels or insufficient brightness Streaks - Image contains one or more dark or light bands that extend horizontally across the majority of the entire document image Excessive skew Image is not in proper alignment Piggyback - Two or more documents are present and overlapped within the document image Folded or torn corners or edges Image is missing information due to source document being folded or torn Size issues Too small/ undersize Image s width or height is below the minimum check size Too large/ oversize Image width or height is above the minimum check size Image compression issues: Below minimum compression - Compressed image size is too low. Above maximum compression - Compressed image size is too high. Front-Rear Dimension Mismatch - Image height and width do not match between the front and rear images of the source document Additional Information Item usability - Banks may simply mirror the Federal Reserve settings for: Too light Too dark. Size of item Etc. Page 146

151 Week 15: April 9 13 Apr. 11 What are some examples of check conversion products where checks are converted to ACH debits? Page 147

152 Week 15: April 9 13 Apr. 11 What are some examples of check conversion products where checks are converted to ACH debits? Check conversion products, in which checks are converted to ACH debits, include: Accounts Receivable Entry (ARC) checks remitted by a customer via the US Mail or a drop box Biller notifies customer that receipt of a check as payment will constitute authorization to convert to ACH Items $25,000 or less and not containing auxiliary on-us eligible Back Office Conversion (BOC) checks written at a point of sale and converted in a centralized location Notice placed at the point of sale (in prominent and conspicuous location) alerts customer that receipt of a check as payment will constitute authorization to convert to ACH Items $25,000 or less and not containing auxiliary on-us eligible Point of Purchase (POP) - in-person purchases made at a point of sale Written authorization from customer to convert to ACH Check is scanned, voided, and handed back to customer plus copy of authorization and receipt Items $25,000 or less and not containing auxiliary on-us eligible Re-presented Check (RCK) - checks that have been returned unpaid due to NSF Notice of RCK policy provided to check writer prior to receiving a check Notice must clearly and conspicuously state terms of RCK policy Receipt of check constitutes authorization to convert to ACH Only consumer checks under $2,500 eligible Page 148

153 Week 15: April 9 13 Apr. 12 What is a customer s responsibility in detecting an unauthorized check conversion? Page 149

154 Week 15: April 9 13 Apr. 12 What is a customer s responsibility in detecting an unauthorized check conversion? According to Regulation E 205.6: A consumer must report an unauthorized electronic fund transfer within 60 days from when the account s periodic statement is made available to the customer to avoid liability for subsequent transfers. Page 150

155 Week 15: April 9 13 Apr. 13 What warranty and process do Rule 9 provisions address in the ECCHO Operating Rules? Page 151

156 Week 15: April 9 13 Apr. 13 What warranty and process do Rule 9 provisions address in the ECCHO Operating Rules? Rule 9 is the commonly used name for special warranty under the ECCHO Rules Section XIX(O) related to Forged/Counterfeit checks Warranty is made by Sending Bank that is also the Depositary Bank to the Paying Bank Both banks must be ECCHO members and not opted out of participation in Rule 9 Item must be exchanged under the ECCHO Rules Note: If item is sent in a forward exchange from the depositary bank through an intermediary that is not an ECCHO member (e.g.; the Federal Reserve), the warranty is not made Warranty states the signature of the drawer of the check (from which the image was created) is not forged or unauthorized and/or the check is not a counterfeit item Additional Information Typically, under check law the Paying Bank would be liable for a forged drawer s signature or counterfeit item if not returned within midnight deadline Rule 9 allows a Paying Bank to make a claim to the Depositary Bank after the drawer customer has made a claim that the item is forged or counterfeit Various timing considerations must be met to make this type of claim Page 152

157 Week 16: April Apr. 16 Under what circumstances may a Rule 9 breach of warranty claim be disclaimed? Page 153

158 Week 16: April Apr. 16 Under what circumstances may a Rule 9 breach of warranty claim be disclaimed? An ECCHO member that is the Depositary Bank that makes the Rule 9 warranty is liable to the Paying Bank under the provisions in Section XIX(O)(2) only if all of the timing and related rules provisions are met Depositary Bank that can disclaim a Rule 9 Breach of Warranty claim may use one of the the following reasons: Account closed Claim amount exceeds funds in account Claim was not made timely, as follows: o Paying Bank s customer did not provide customer written statement within 60 calendar days after account statement of check made available o Paying Bank did not deliver warranty claim within 15 Business Days of receipt of customer written statement o Paying Bank failed to deliver copy of customer written statement within 15 Business Days to Depositary Bank Depositary Bank is not the first bank to which the check was transferred (BOFD) o Paying Bank must make claim directly to Depositary Bank Depositary Bank is opted of of Rule 9 participation Other defenses as provided by other applicable law Page 154

159 Week 16: April Apr. 17 What is the function of Cash Management? Page 155

160 Week 16: April Apr. 17 What is the function of Cash Management? Sometimes referred to as Treasury Management, a Cash Management area in the bank generally has the following goals for its clients and the Bank: Process receipts and payments in an organized and efficient manner Increase the speed of collections of accounts receivables Maximize cash to allow for the needed resources to invest (excess or idle cash) Grow cash reserves Page 156

161 Week 16: April Apr. 18 What is an example of a common Cash Management product or service? Page 157

162 Week 16: April Apr. 18 What is an example of a common Cash Management product or service? Lockbox Cash management service offered by banks to customers to expedite receivables processing Bank sets up a post office box, opens mail, and deposits checks received on behalf of its customers May be characterized as either retail or wholesale lockbox products: o Retail Lockbox: Companies such as utilities that receive a large number of payments in the mail, often with a check accompanied by a remittance advice/stub, which can be processed/captured in an automated process o Wholesale Lockbox: Companies with small numbers of payments, sometimes with detailed requirements for processing such as a doctor s or dentist s office Additional Information Other examples of Cash Management products or services include: Balance Reporting: Secure, internet-based reporting of account and transaction information at customer s lead bank. May include balances in foreign currencies, balances at other banks, information on cash positions and float, or investments Zero Balance Accounting: Designed for customers who fund decentralized accounts from a central main account; as debits are charged to ZBAs, funds automatically transfer from the master account to cover the debit and bring the sub-account balance to zero ACH Disbursements: Scheduling recurring payments through ACH system for such payments as dividends, interest, pensions, or direct payroll deposit Account Reconcilement Services: Allows companies to verify checks they issue daily to keep track of which checks have cleared and which have not. Example may include: o o Positive Pay: The bank only pays checks with exactly the same specifications as listed in the Issue File (amount, payee, serial number, etc.) Reverse Positive Pay: The bank sends a file to the customer, who compares the information on the file to its internal records and lets the bank know which checks match and should be paid Controlled Disbursement: Daily report is provided early in the day to the customer detailing the amount of disbursements that will be charged to the account that day, allowing the customer to fund the account appropriately and invest any excess funds intraday Page 158

163 Week 16: April Apr. 19 What does the Presumption of Alteration mean under the ECCHO Rules? Page 159

164 Week 16: April Apr. 19 What does the Presumption of Alteration mean under the ECCHO Rules? This is an ECCHO Rules provision intended to provide a uniform rule regarding presumption of alteration (versus counterfeit) when there is a dispute over an imaged item and the original check is unavailable for review Intended to apply in situations where dispute on whether an image exchanged under the ECCHO Rules was created from an altered or counterfeit item Applies to items that are exchanged as Electronic Images Establishes an evidentiary presumption of alteration for the physical check Check was truncated and then destroyed or otherwise unavailable after creating and exchanging the image Added to ECCHO Rules after disputes resulted in various court decisions that took differing views for cases related to situations where lack of evidence to establish either alteration or counterfeit of physical check that was imaged See ECCHO Rules Section XIX (P) and related commentary for additional details Page 160

165 Week 16: April Apr. 20 Good Luck You Can Do It! 2018 NCP Exam window: April 21 - May 12 Visit the ECCHO/NCP on the web at Page 161