ECCHO Returns and Adjustment Meeting February 28, 2013

Transcription

1 ECCHO Returns and Adjustment Meeting February 28, 2013

2 Meeting Agenda Tuesday February 27, 2013 Issues Roundtable Section 12 Participants 4:30-6:00 Meeting Agenda Wednesday February 28, 2013 Coffee 8:00-8:30 Opening Comments Section 1 Phyllis Meyerson 8:30-8:35 Return and Adjustment Rules Section 2 Phyllis Meyerson 8:35-8:50 Duplicates Section 3 Phyllis Meyerson 8:50-10:00 Break 10:00-10:15 Duplicates (Cont) Section 3 Phyllis Meyerson 10:15-11:00 Provider Panel Section 4 Susan Goold Cindy Rasche Angie Smith 11:00-12:15 Lunch and Roundtable 12:15-1:15 Other Issues Phyllis Meyerson 1:15-2:50 Hierarchies Section 5 Administrative and Return Codes Section 6 Rule 9 Section 7 Mis-Match - Piggybacks Section 8 Looping Scenarios Section 9 Damages Due to Under-Encodings Section 10 Centralized Return Processing Section 11 Notification of Non-Payment (EARNS) Section 12 Returns vs Adjustments Section 13 2:50-3:00 Meeting Recap Phyllis Meyerson Adjourn Meeting 3:00 February 28, 2013 Agenda Page 1

3 Opening Comments Opening Comments Welcome Any questions about schedule and meeting facilities ask Elizabeth Over 110 individuals will participate in meeting Size of this meeting shows significant interest in topic Background ECCHO conducted successful Returns and Adjustment meeting in summer of 2008 At that meeting focused mostly on return rules including Indorsements Return Hierarchy Decision to develop Adjustment rules Since that meeting significant interest in Returns and Adjustments Subcommittee Growth of image exchange increased number and types of imaged items in adjustment process Differences in paper and image adjustment processes Purpose of Meeting ECCHO s goal is to make check payment system more efficient Primary purpose of meeting is educational, consensus and relationship building Discussing and reaching consensus on operational issues Secondary purpose to determine if return and adjustment rules serves membership or is there need to change rules Consider unique issues associated with return and adjustment of imaged checks Rules modifications will be made as applicable to ECCHO forward, return and adjustment rules February 28, 2013 Section 1 Page 1

4 Returns and Adjustment Rules ECCHO Rules ECCHO rules can be accessed on at Return Rules Section XX Electronic/Image Returns Developed rules to be flexible for any known scenarios Incorporated return requirements from Reg CC and UCC Have continually updated return rules Aspects of Return Rules Forward indorsement requirements needed for returns Section XIX(E) Must indorse check or image Electronic indorsements allowed Require at least one electronic indorsement If BOFD must apply BOFD indorsement Under UCC Returning Member not limited to return reason, so can return for any reason prior to midnight deadline Commentary recommends banks maintain indorsements not rule Bank not required to indicate all applicable return reasons Allowance for two representments Warranties Complies with requirements of rules Electronic/image return accurately corresponds to originally received Item being returned Image return is acceptable copy No duplicate presentment Not Our Item Return sent to wrong bank, bank forward to BOFD Return with administrative reason send back through adjustment process February 28, 2013 Section 2 Page 1

5 Returns and Adjustment Rules Return Hierarchy Applies to return of image or Substitute Check Does not apply to Administrative Reason or Collecting bank handling image prior to presentment Rules silent in these situations Adjustment Rules Prior to 2008 R & A meeting ECCHO rules contained a minimalist adjustment process in Section XII At that meeting decided to develop more extensive adjustment rules Rules and matrix approved November 2009, with continual updating Adjustment providers did not adopt rules immediately Viewpointe adopted rules in 2011, SVPCO planning to adopt this year Must be ECCHO member to use ECCHO Adjustment rules Adjustment Matrix attached Use of certain codes including NCIs, NCHs, NOI for fraud and forgery February 28, 2013 Section 2 Page 2

6 Returns and Adjustment Rules Adjustment Rules February 28, 2013 Section 2 Page 3

7 Returns and Adjustment Rules Adjustment Rules February 28, 2013 Section 2 Page 4

8 Returns and Adjustment Rules Adjustment Rules February 28, 2013 Section 2 Page 5

9 Duplicates Background No double debit warranty under Check 21 and other image exchange rules Early 2005 duplicate substitute checks Print issues mostly remedied System issues mostly remedied Image exchange caused image duplicates System issues mostly remedied RDC issues??? RDC Duplicates Outside control of banks Industry issue and concern As RDC continues its growth, duplicates will continue Fraudulent intent Sammy Shyster Unintentional Error Sammy Stupid Legal Considerations Reg CC, ECCHO Rules, Reg J and OC3 duplicate warranty With minor variations the warranty reads (ECCHO) (Section XIX(L)(7)) Sending Bank warrants to Receiving Bank with respect to each Electronic Image sent to the Receiving Bank that: (7) 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; NACHA rules have similar warranty against presentment of original item for check conversion No duplicate warranty exists on original item Intended to protect Receiving Bank regardless of form of duplicate item Warranty limited to situation where Receiving Bank pays item already paid Not applicable for represented item February 28, 2013 Section 3 Page 1

10 Duplicates Claims ECCHO RETURNS AND ADJUSTMENTS To whom can Paying Bank C make claim? To either BOFD A or BOFD B BOFD A and BOFD B both made warranty to Paying Bank C Paying Bank has option to either BOFD B being second does not limit Paying Bank to make claim Claims Between BOFDs Reg CC and image language the same February 28, 2013 Section 3 Page 2

11 Duplicates Claims Between BOFDs Is there basis for claim between BOFDs? Rules and check law does not address claims between BOFDs No exchange between BOFDs, no warranty made Warranties arise from exchange of check images Reg CC does not address this for substitute checks Unknown if there is basis for loss sharing under other law Consult legal counsel Discuss with 2 nd BOFD to reduce or share loss Any possible ECCHO rules BOFD A and its customer has agreement, usually requiring customer to secure original paper That agreement is contract law between BOFD A and its customer No other bank is party to that agreement Nothing in ECCHO rules regarding not securing original paper For reason of BOFD B to reject claim For reason of BOFD B to make claim to BOFD A Intermediary Adjustment Process Many banks act as intermediaries for image exchange Intermediary typically has some relationship (customer) with their correspondent banks May have commitments regarding adjustments Nothing in ECCHO rules regarding directing paying bank to deal direct with BOFD Fed makes entries based on timeframe of adjustment and directs banks to deal direct at some point in time When image is sent from Bank A to Bank B to Bank C, Bank A made warranty to Bank B who made warranty to Bank C Both Bank A and Bank B are liable February 28, 2013 Section 3 Page 3

12 Duplicates Intermediary Adjustment Process When Bank B gets claim will typically make claim to Bank A Bank B sometimes caught in middle because of relationship Should Bank B be protected and if so, how Different Indorsements Do different indorsements indicate different paper checks? Duplicate arose from same image, paper check source of image or other image of same original check If two payments arose from two different original checks, then no duplicate claim Two different indorsements not determination of different paper checks Additional review and investigation needed Examples Payee customer has electronic overlay indorsement by RDC Customer indorses to check casher Two images have different payee and bank indorsements Check images arose from same original paper check It is a duplicate Payee customer signs/indorses paper check and deposits through RDC Customer opens second account and deposits Same payee indorsement, but different bank indorsements Check images arose from same original paper check It is a duplicate Fraudster creates multiple counterfeit checks and deposits at different banks Checks look the same Different payee and bank indoresments Check images arose from different original checks Not a duplicate Customer prints and signs two identical checks Same amounts and payees Drawer Customer mails two checks to Payee Customer Payee Customer uses RDC to deposit checks at same or different BOFDs Two check images created from different original checks Not a duplicate February 28, 2013 Section 3 Page 4

13 Duplicates Check Cashed Customer deposits check through RDC at BOFD Customer takes check directly to Paying Bank and cashes check Paying bank has duplicate claim to BOFD BOFD warranted item would not be paid twice Represented Duplicates Duplicate warranty limited to situation where Receiving Bank pays item already paid Not applicable where Receiving Bank returned and reversed settlement of first item, then receives second item Receiving Bank only paid single item Paying bank return system should interface timely with duplicate system How long maintain items for duplicate detection February 28, 2013 Section 3 Page 5

14 Duplicates RDC IRD Deposit Question of whether customer can deposit IRDs through RDC Previously most banks did not allow IRDs be deposited through RDC Some software did not allow Some customer agreements did not allow Some software updates now allowing IRDs to be processed through RDC Two ways customer could have IRD to deposit through RDC Received as return and representing or Created from original check Both IRDs would have 4 in EPC field Return IRD would have return information on it May be possible to interrogate to identify return information on item Created from return IRD Created from original check February 28, 2013 Section 3 Page 6

15 Duplicates RDC IRD Deposit If IRD is return, reconverting and truncating bank already identified on IRD Could be the bank offering this RDC product or other bank Reconverting bank takes risk under Check 21 Return IRD has least risk to RDC Bank Reconverting bank already taken risk IRD from original check Need to identify a reconverting bank Likely RDC bank Check 21 allows customer to create IRD, with first bank to which IRD is deposited becomes reconverting bank Very few banks allow this Sample deposit language in the ECCHO Rules (in Exhibit IV) to not allow this and if customer does, customer liable Few scenarios now that make this reasonable Was some scenarios during Check 21 implementation Allowing customer represent returned IRD, can potentially help with duplicates If IRD represented then return reason code and all endorsements on it Allowing paying bank more easily and accurately determine represented check When not allowed to represent IRD, customer may pull original item and redeposit making duplicate detection more difficult Intermediary Duplicate Checking Some intermediary banks do duplicate checking May cause issues for a represented item For discussion on indorsements and flipping records see r_09.pdf February 28, 2013 Section 3 Page 7

16 Duplicates Intermediary Duplicate Checking Process - Return Process - Representment Return Reason Code Paying Bank should add return reason to its Type 35 Record Match Return Reason in Type 31 Record Other institutions in return collection chain when adding own Type 35 record should propagate return reason from Type 31 Record or last Type 35 Record received Should be the same Type 28 Record should only have return reason, if created (flipped) from Type 35 Record that had return reason Without return reason, item may be flagged as duplicate Especially intermediary bank with no knowledge that item was returned February 28, 2013 Section 3 Page 8

17 Duplicates Intermediary Duplicate Checking Proper handling of represented item to avoid incorrect identification as duplicate Proper use of return reason codes on representment in file Do not re-image original item Use IRD Use of original item RDC customer pulls original for representment Item returned and needs some physical correction Payee Indorsement WIC stamp Do not use original, it no longer has previous indorsements and/or return reason Not required to use original, since original already truncated Very difficult to use original and try to properly populate return codes in file Use IRD and put the indorsement or required stamp on it Check 21 language says Substitute check is accurate representation of original at time item was truncated Already been truncated Put additional stamp on IRD Prior to return imaging banks stamped return reason on IRD February 28, 2013 Section 3 Page 9

18 Duplicates Duplicate Presentment in Context of Consumer RDC Introduction and Background ECCHO Legal Subcommittee previously looked at issues associated with HIDC in context of image exchange and RDC Recently, issue of HIDC claims and application of no double payment warranty been raised by Members ECCHO brought issue again to Legal Subcommittee for input Consideration of Rules, commentary or adjustment process changes appropriate to assist Members in resolving double payment warranty claims Changes to RDC landscape RDC volume growing as more banks offer service Many banks announced plans to offer RDC to consumers More check images cleared arising from mobile RDC Greater RDC volume may result in increase duplicate presentments to and payment by paying banks and subsequent warranty claims Legal and Returns and Adjustments Subcommittees considered whether possible rule or commentary changes needed to assist Members Legal Subcommittee position No Rule changes needed at this time and Current ECCHO Rule on duplicate payment already covered HIDC-related duplicate payment warranty claims Subcommittee prepared possible new Commentary to assist Members in understanding application of warranty against duplicate payment in HIDC scenarios Update duplicate paper prior to updating commentary in rules Once approved by Operations Committee will be considered by ECCHO Board Overview of Scenario February 28, 2013 Section 3 Page 10

19 Duplicates Holder in Due Course (HIDC) Scenario Possible Commentary changes to Section XIX(L)(7) Reviewed at Operations Committee meeting Check Casher took check in good faith without knowledge of issue with check Is holder of item Has original item Not all check cashers or other claimants have HIDC status or have valid claim Status will depend on facts and circumstances Paying Bank returns or adjusts item back to BOFD B Paying Bank could make claim to either BOFD B or BOFD A BOFD B charges Check Casher BOFD B cannot reject claim just because they or customer is HIDC Check Casher makes claim directly to Drawer as allowed under UCC With demand letter Can only make to drawer Drawer already paid item when posted to its account at Paying Bank Drawer pays Check Casher due to fear of potential bad credit Drawer requests reimbursement from Paying Bank for item it already paid Paying Bank can make claim to BOFD A under ECCHO warranty against duplicate payment New ECCHO commentary explains how ECCHO warranty against double payment applies in situation involving HIDC claims No change to existing ECCHO rules Commentary explanation of existing rules Reflects Legal Subcommittee view on how existing rules apply in this situation Discussion on Possible Alternate Scenario This scenario could avoid some complications of HIDC claims and subsequent warranty claims May be more efficient February 28, 2013 Section 3 Page 11

20 Duplicates Discussion on Possible Alternate Scenario Check Casher took check in good faith without knowledge of issue with check Is holder of item Has original item Not all check cashers or other claimants have HIDC status or have valid claim Status will depend on facts and circumstances Paying Bank returns or adjusts item back to BOFD B Paying Bank could make claim to either BOFD B or BOFD A BOFD B attempts to charge Check Casher Check Casher is HIDC BOFD B tells Paying Bank it or its customer has original item and is HIDC Paying bank then makes claim to BOFD A Assuming timing and other requirements can be met Advantage to Alternate Scenario Drawer customer does not receive direct claim from check casher/hidc Resolution of duplicate payment claim handled within banking system More expeditious May be appropriate for BOFD A to bear risk of loss from double payments BOFD A introduced risk by allowing customer to engage in remote deposit capture Customer did not secure original paper BOFD A in best position to collect on claim from customer Customer and bank typically have legal contract, protecting bank February 28, 2013 Section 3 Page 12

21 Duplicates Possible Revision to rules and/or matrix Claims between BOFD B and BOFD A Should there be rules to allow for this claim Is not securing paper valid reason for claim Rules to allow intermediaries to direct their banks to deal direct To protect the intermediary Rule to require paying bank to accept reject of duplicate claim when have paper Possible identification to identify Claim arising from payment by drawer or paying bank to holder Could be used for volume tracking or alerting presenting bank that its customer has issues with controlling paper Information or documentation needed for inclusion with Claim for warranty breach where payment of holder by drawer Examples of information could include (i.e. copy, name, other) Others? February 28, 2013 Section 3 Page 13

22 Provider Panel Presented by Susan Goold SVPCO Cindy Rasche Federal Reserve Angie Smith Viewpointe Power Point Presentation attached February 28, 2013 Section 4 Page 1

23 Other Issues Topics Overview Overview Too many additional topics for time allowed Plan to choose which topics want addressed Hierarchies Section 5 Review and possible addition to return hierarchy Possible Adjustment hierarchy Administrative and Return Codes Section 6 ECCHO rules minimalist on Administrative Reasons Administrative Reason return codes Rule 9 Section 7 Still questions on application and use of Rule 8 and Rule 9 Differences, when and how can be used Mis-Match Piggy Back Section 8 Are piggybacks handled the same as mis-match Looping Scenarios Section 9 Retired R/Ts, invalid items and adjusting looping Damages Due to Under-Encoding Section 10 Proper handling of a rejected encoding claim from BOFD Centralized Return Processing Section 11 Some change in process when went from paper to image Are there issues with this Notification of Non-Payment (EARNS) Section 12 Are EARNS notices still needed in image environment Returns vs Adjustments Section 13 Certain exception (duplicates, NCI) can be handled as either returns or adjustments Which is best now February 28, 2013 Other Issues Page 1

24 Other Issues - Hierarchies Return Hierarchy ECCHO established return hierarchy Hierarchy excludes Administrative Reasons and Collecting Banks prior to presentment Need for addressing Administrative Reasons and/or Collecting Banks? Adjustment Hierarchy Is there interest in establishing hierarchy for adjustments Rule or practice of where to send adjustment Always go back to source Go to BOFD or other Collecting Bank February 28, 2013 Section 5 Page 1

25 Other Issues - Administrative and Return Codes Background Term administrative return first used in ACH for returns related to incorrect formatting of account number, usually for check conversion In image exchange typically items returned to sender of image due to technical or administrative reasons and not related to customer posting Poor quality/usability Ineligible items Missing images Mis-matched MICR Non-conforming image Sometimes items are handled in adjustment process, sometimes in return process Under check law no limitation on reason to return item as long as return follows rules for returns Under UCC they must meet midnight deadline Under Reg CC they must meet 2 day test Industry refers to administrative and monetary returns All returns carry monetary value Monetary returns refer to items attempted to post to customer Image Exchange files support two types of returns, both of which represent monetary value Customer (or also known as Monetary) returns items being returned that affect customer s account Typical return reasons used in paper exchanges for years (i.e. NSF, Closed Account, Stop Pay, etc.) Administrative Returns being returned that are handled by bank and usually do not directly affect customer or their account Need to be sorted from customer returns and handled separately Many cases are adjustments and will be handled by adjustment area of bank These include: poor quality image, missing image and duplicate Questions related to allowable timeframe for administrative returns After item is sent in image file, how long does bank have to send administrative return before it needs to be handled as adjustment ECCHO rules and some BPAs do not specifically address them Some BPA s define administrative return February 28, 2013 Section 6 Page 1

26 Other Issues - Administrative and Return Codes Background ECCHO rules minimal references to Administrative Reason Definition of Administrative Reason Allowance for Administrative Reason for Savings Bonds Exclude Administrative Reason for return hierarchy Administrative Reason Returns UDC identifies Administrative Reasons Cash letter must be flagged with e to identify administrative returns Only certain return codes can be used Administrative reason returns include I - Image Missing (dual meaning) Q - Ineligible (dual meaning) U - Unusable Images V - Image Fails Security Check Y Duplicate Presentment 1 - Does not conform with ANS X Specifications for TIFF Image Format 2 - Does not conform to Industry's UCD (Universal Companion Document) 3 - Warranty Breach (includes Rule 8 & 9 claims) No other return codes should be used for administrative reason Dual Return Codes In X certain codes have dual meanings I Customer return - Endorsement Missing Admin return Image Missing Q Customer - Not Authorized (Includes Drafts) Unauthorized item such as a draft Admin return - Ineligible 3 - Warranty Breach (includes Rule 8 & 9 claims) Can be used for both customer and admin returns February 28, 2013 Section 6 Page 2

27 Other Issues - Administrative and Return Codes Return Reason Codes X - Refer to Image Return Information contained within image Reason may have been stamped on item by paying bank or printed on IRD Generally used by intermediary processor when paper return item is received and converted to image Was mostly used by Fed Use of code when return reason appears on face of item can cause undesirable impacts to BOFD s downstream applications Banks may choose to change reason X to return reason appearing on item Are banks using X or changing to code on item See Proper Use of Return Reason Codes at df Possible Rules Timeframes for administrative returns If handling as return must be within return windows If handling as adjustment, time period is not addressed in current ECCHO rules Add Administrative returns to return hierarchy Processes for administrative returns Allow certain warranty claims to flow into the return process, regardless of return timeframes February 28, 2013 Section 6 Page 3

28 Other Issues - Rule 9 Rule 8 Remotely Created Checks Regulation CC Definition of Remotely Created Check Check that is not created by paying bank and that does not bear signature applied or purported to be applied, by person on whose account check is drawn Warranty in Section (d) Bank that sends RCC and receives settlement warrants to other banks, that person on whose account RCC is drawn authorized issuance of check in amount stated on check Reg CC did not establish a process for RCC claim Claim process FRB services established adjustment type for RCC sent through Fed Bank has 90 days from settlement of cash letter to make claim Signed affidavit accompany claim No ability to disclaim ECCHO rules two ways to make claim Process within ECCHO rules use return mechanism (Section XIX(N)) but is not return Delivered to location Depositary bank receives returns Not sent through Fed Adjustment process for unauthorized RCC mirrors Fed claim (Section XII and Adjustment Matrix) Similar to Fed Not allowed to disclaim adjustment Provisions and deadlines in Section XIX(N) not apply Claims do not need to be notarized Why Need for Rule 9 Depositor Strong Incentives to take check Merchant in best position to verify identification UCC creates risk free transaction if forged signature since risk is transferred to paying bank Depositor recoups costs, makes profit Depositor decision cause paying bank losses February 28, 2013 Section 7 Page 1

29 Other Issues - Rule 9 Modern Check Processing MICR encoding checks serve as carrier of electronic data Image only furthered electronification of check Subsequent to BOFD, checks rarely touched by human hands Minimum signature verification Signature verification has been made defunct New technologies Volume demands of business commerce UCC Warranties Transfer warranties not to Paying bank No forged endorsements No alterations No unauthorized signatures Presentment warranties given to Paying bank No forged endorsements No Alterations No knowledge of any unauthorized signatures Paying bank Cannot make claim for counterfeit/unauthorized item after midnight deadline Can make claim for altered item after midnight deadline Rule 9 Forged and Counterfeit Checks Sending Bank (that is BOFD) warrants Signature of purported drawer is not forged or otherwise unauthorized, and/or Related Physical Check is not counterfeit Warranty only applies to exchanges under ECCHO rules ECCHO rules only cover image exchanges Warranty begins with BOFD and is made to each member in forward exchange Not made by intermediary bank If bank accepts deposit from foreign bank, while BOFD under Reg CC, does not make warranty under ECCHO rules Warranty does not apply if non-eccho member exchange Warranty does not apply for exchange through Fed Warranty does not apply to paper exchange February 28, 2013 Section 7 Page 2

30 Other Issues - Rule 9 Rule 9 Forged and Counterfeit Checks BOFD does not maintain loss, if depositing customer does not have funds in account Sufficiency of funds provision allows BOFD to disclaim if claim exceeds available funds on at least one day Only required to review account once If funds in account, BOFD liable to paying bank for amount even if bank chooses not to charge customer No funds, loss moves back to paying bank Participation is default in ECCHO Rules Opt-out permitted Unless member subject to agreement that makes rule mandatory Similar timing/process as RCC warranty claim (when using returns) Paying Bank must make claim to BOFD via return process Use return mechanism, but actually adjustment Cannot send these claims through the Fed Return must contain notation of Breach of Warranty and/or Do Not Redposit or Re- Present or similar language Paying Bank may use reason code that reflects item is sent as warranty claim Image standards use return reason of 3 Warranty Breach Sending Bank may disclaim warranty claim for Account closed Claim amount exceeds funds in account Claim was not made timely as defined in rules Sending Bank is not first bank to which check was transferred Opt-out in effect Other defenses as provided by other applicable law February 28, 2013 Section 7 Page 3

31 Other Issues - Rule 9 Rule 9 Forged and Counterfeit Checks Claim process Challenges for Image Paying Bank Claim must be made to BOFD as return Claim cannot be made through Fed If bank returns through Fed, no mechanism to make claim Banks are sending letters to make claim Claim made through Fed may be rejected as late return Original rule required stamp to tell BOFD Rule 9 claim Stamp not practical in image, so allowed for return reason Return reason as either customer or administrative return of 3 Warranty Breach (includes Rule 8 & 9 claims) Disclaim process, still needs work Rule 9 claim and disclaim cannot be made to intermediaries or Federal Reserve Claim must be made directly to BOFD February 28, 2013 Section 7 Page 4

32 Other Issues Mis-Match Piggy Backs Definitions Fed definition - Items in which the MICR information associated with the item does not match the MICR information reflected on the image ECCHO Rules definition - the Electronic Image does not match MICR information in the related Presentment Notice (data record) Generally agreed upon Mis-Match definition by this Subcommittee Image that contains significant conflicting information between image and data record or MICR line used for processing Significant conflict exists when more than one of following is different: Routing Transit Number, account number, check number, process control and aux-on us Full MICR line of one item or multiple items misaligned with image of other item or sequence of items Encoding error of amount and/or incorrect character(s) in MICR field not mis-match Piggyback - Two or more documents present and overlapped within document image Are mis-matched and piggy back handled the same MICR Data and Check Image Match February 28, 2013 Section 8 Page 1

33 Other Issues Mis-Match Piggy Backs MICR Data and Check Image Do Not Match February 28, 2013 Section 8 Page 2

34 Other Issues Looping Scenarios Background Many adjustments cause looping Looping is when item continually gets routed between two or more institution without resolution Looping delays resolution and potential causes loss to incorrect party Examples of Looping Invalid RTs Invalid Items Adjustment Reversals Others? Invalid R/Ts February 28, 2013 Section 9 Page 1

35 Other Issues Looping Scenarios Invalid Items Adjustment Reversals February 28, 2013 Section 9 Page 2

36 Other Issues Damages Due to Under-Encoding Scenario BOFD under encodes item BOFD makes warranty under Reg CC that encoding is correct BOFD realizes it made mistake and tries to make an encoding claim to paying bank Paying Bank customer closed account or does not have enough money in account Paying Bank can make Damages Due to Under Encoding claim Reason Paying Bank can do this is BOFD made warranty that encoding was correct and paying bank should not be out for BOFDs mistake Periodically question arises about a rejected/reversed encoding error adjustment Some Paying Banks reversing encoding claim saying no money in account If paying bank is unable to charge account for difference can claim underencoding Scenario Should use Damages Due to Underencoding adjustment so BOFD knows why being reversed Fed has form at Form not required under ECCHO Rules Should it be February 28, 2013 Section 10 Page 1

37 Other Issues - Centralized Return Processing Regulation CC (d) says depositary bank may arrange with another bank to apply the other bank s indorsement as depositary indorsement Provided any indorsement by (true) depositary bank avoids area reserved for depositary-bank indorsement Other bank indorsing considered depositary bank under subpart C of Reg CC Commentary says Rational for allowance was for correspondent to indorse for respondent or when bank servicing ATM or Lockbox indorses for bank that maintains account Centralized Return Processing not mentioned By agreement with (true) depositary bank other bank may apply its own indorsement as depositary bank Bank indorsing as depositary bank will receive returns (True) depositary bank still responsible for availability and other Reg CC requirements Regulation CC Some Observations Many times Centralized Return Processor and true depositary bank indorsements are put in depositary bank indorsement location on check Regulation assumed agreement between banks to do this processing In typical Centralized Return Processing environment agreement is between customer and Centralized Return Processor, not with (true) depositary bank February 28, 2013 Section 11 Page 1

38 Other Issues - Centralized Return Processing Centralized Return Processing Industry is familiar with Centralized Return Processor products A number of banks and third party processors offer this service Some centralized return processors are ECCHO members In image environment some banks and/or customers are putting the Centralized Return Processor RT in the forward image file In Type 26 Record RT is bank RT that allows third party processor to use for this purpose Paying bank returns item to RT identified in Type 26 record During first ECCHO R & A meeting significant issues associated with this process Are there still issues? And if so what are they? February 28, 2013 Section 11 Page 2

39 Other Issues Notification of Non-Payment (EARNS) Notification of Non-Payment (EARNS) Reg CC requires notice of non-payment for items over $2500 that will not be received by depositary bank by 4:00 p.m. two days after presentment Regulation allows that if the return will be received in that timeframe not required to give notice Return acts as notice In determining whether to send notice, bank can rely on availability schedule of Returning Bank ECCHO incorporated Regulation CC commentary in ECCHO Rules Commentary (Section XX(F)) During Reg CC RFC Fed asked about eliminating this requirement since all checks are local and must be returned within notice timeframe Are banks still providing notice? February 28, 2013 Section 12 Page 1

40 Other Issues Returns vs Adjustments Returns vs Adjustments Industry trying to determine how to best handle certain exceptions (duplicates, NCI) Adjustments vs. returns Return or adjust first or second item Returns Faster Timely settlement May have negative impact on innocent parties (depositing customer and drawer customer) Use correct return reason code for Duplicate May avoid some negative impact Personnel not familiar with process Do not lose right of return Significant issue if item is counterfeit or forged and not duplicate Adjustments Made to appropriate party No negative impact to customers Handled within banking system Personnel familiar with process Historically resolve these issues Less efficient than returns Less timely settlement More paperwork May have dollar limits and/or fees associated with adjustments May lose right to return item Significant issue if item is counterfeit or forged and not duplicate Lost right to return because of timing, not because adjustment made Decision to return or adjust at discretion of bank As long as within return deadlines can return February 28, 2013 Section 13 Page 1

41 Other Issues Returns vs Adjustments Returns vs Adjustments During initial work on duplicates industry felt adjusting duplicates was best Still has potential to loss right to return Normally less impact to customers Handled by right individuals at the banks Problem caused within banking industry Bank performs its own risk analysis Encouraged to seek legal counsel on potential legal risks Known operational duplicates should be resolved as adjustments When cause unknown, fraud may be involved, return would protect legal rights Adjusting made sense when problem was caused within banking system RDC duplicates caused by customer, outside banking system Is it time to rethink returning duplicates With return more likely to get to customer faster when funds may still be available February 28, 2013 Section 13 Page 2

42 Meeting Recap Possible ECCHO Rule Changes Possible Operational Changes Subcommittee to continue to work on these issues Will be scheduling conference call meetings February 28, 2013 Meeting Recap Page 1

43 Issues Roundtable Background A primary goal of ECCHO and TCH is to assist its members with image issues and opportunities ECCHO and TCH members continuously face technical and systems issues relating to image implementation and exchange Members ask for opportunities to share implementation and/or exchange issues ECCHO and TCH has and continues to sponsor events to aid the members with their image exchanges Structure Roundtable discussion will be informal Minutes will not be taken Any significant issue group feels needs to be pursued will be noted Limited recommended issues (not in any order) submitted from membership follow Other topics can be discussed Issues Submitted Use of Type 26 record Use of Return Reason X Refer to Image Return and ICLR Processing Hours, cut-off and end of day times, etc. Proper handling of item with different amount in legal and courtesy field Unauthorized RCCs EPC digit for RCCs Returns made to Fed due to lack of other endorsement information Disclosure requirements for non preprinted deposit slips Use of codes: NOI, NCI, NCH for Fraud and Forgery Drafts that look like RCCs Image Available Upon Request Check retention of transit truncated items Late returns - Presentment Return location BOFD RT liability/responsibility under UCC Going Forward Other issues group wants to discuss Any required documentation of the issues and resolutions discussed February 28, 2013 Section 14 Page 1