ECCHO Education: Wells Fargo Part 2 November 9, Part 2: Check Operations and Exceptions. Prepared for: Wells Fargo Bank NOTICE

Transcription

1 November 9, 2015 ECCHO Education Programs Part 2: Check Operations and Exceptions Prepared for: Wells Fargo Bank NOTICE This presentation provides information on various aspects of check payments and the legal and rules framework for check image exchange. Responsibility for compliance with image exchange rules, and/or the legal, operational and regulatory requirements applicable to check image exchange, remains at all times with the financial institution participating in check image exchange and/or the individual or company using a check image exchange service. This presentation and the information contained herein is not intended as legal or compliance advice or recommendation to any person or company. This document could include technical inaccuracies or typographical errors and individual users are responsible for verifying any information found in this presentation and any related recorded playback. Financial institutions should consult with their legal counsel regarding legal and operational requirements applicable to any check image exchange program they may offer or in which they participate. These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO. 2 1

2 Wells Fargo Training Topics Part 1: Industry Trends: Transition from paper to image Regulatory check definitions: UCC & Reg CC Image Exchange Rules and Agreements ECCHO Rules Key provisions Topics Part 2 Check Operations: Image Cash Letter and X9 Standards Exceptions: Returns and Adjustments Regulatory Requirements and Timing Return Reason Codes Common Exchange Scenarios (based on FAQs from members) MICR Mis Match, Positive Pay, Duplicates, Holder in Due Course(HIDC) Q&A 3 Check Operations 2

3 Check Standards X : Image Replacement Document IRD X : Magnetic Ink Printing (MICR) Part 1: Placement and Location Part 2: EPC Field Use X : Electronic Exchange of Check and Image Data 5 X Standard What s the difference between an Image Replacement Document (IRD) and a Substitute Check? Nothing! IRD: Technical definition in X standard Substitute Check: Legal definition in Reg CC Designed to be processed exactly as if it were original paper check Legal equivalent of original check for all purposes Contains image of front and back of check Conforms to industry standards Suitable for automated processing Must accurately represent all information on original check Bears legal legend Includes all indorsements Includes identification of party creating it 6 3

4 Forward Substitute Check Front Legal Legend Creating Institution Routing Number, Creation Date & Sequence Number Original Truncating Institution Routing Number, Date & Sequence Original Scanned Front Image Clipped Area [ ] 01/03/2002 Optional Area No branding or marketing Substitute Check Identifier MICR Line from Original Check Notes: Creating, truncating and BOFD Institution is not necessarily the same. Truncating Institution is not necessarily the BOFD or Return Location. Look at Endorsement on back for Return Location. Date & Sequence numbers may not be available for Truncating Institution. 7 Forward Substitute Check Back 8 4

5 X Standard Electronic Exchange of Check and Image Data Standard for image files exchanged today Cash letter structure Both forward and return records Universal Companion Document UCD is a guideline to establish industry consistency in use of the X standard Not currently part of the standard Bank driven approach with focus on business needs not technological capabilities of image exchange 9 Physical Cash Letter Structure One file (File ) with three cash letters Cash letter may have one or more bundles Cash Letter #1 3 Bundles forward debits Cash Letter #2 1 Bundle forward debits Cash Letter #3 2 Bundles forward debits File Paper Check File Bundle 2 Bundle 1 CASH LETTER #3 WITH TOTAL Bundle 1 CASH LETTER #2 WITH TOTAL Bundle 3 Bundle 2 Bundle 1 CASH LETTER #1 WITH TOTAL 10 5

6 Forward Collection Image Cash Letter Image Cash Letter: Digital images of paper cash letter; includes both the MICR data record and the transmitted check images DEPOSITS CHECK CASH LETTER CASH LETTER CUSTOMER SENDING BANK (BOFD) Receiving Bank / Presenting Bank PAYING BANK STORE CHECKS Truncation: Stop processing of physical paper item(s) and transmits the electronic image(s) and MICR data 11 Selected Record Views X Forward Presentment Bundle Diagram Bundle Header (20) Forward Presentment Bundle Item(s) Bundle Control (70) LEGEND M C Mandatory Record Conditional Record C Logical Entity Multiple Logical Entities Multiple Conditional Records Check Detail 25 Record Check Detail Add. A 26 Record Addenda Records Check Detail Add. C 28 Record Image View 25 record contains check MICR DATA One 26 record to identify return location One 28 record to identify each subsequent endorser Image View Detail (50) Image View Data (52) Record Types 50 and 52 occur together for each Image View Pair of 50/52 records for front view Pair of 50/52 records back view 12 6

7 Selected Cash Letter Records Forward Check Detail Record (Type 25) One record for each check containing: Information from MICR line of check Item Sequence Number For business sized check, would carry aux on us field Optional field left of routing number field on MICR line Used on business sized checks for: Consecutive serial numbers Account control information Product codes/ other information Check Detail Addendum A Record (Type 26) Associated with previous Check Detail Record May contain multiple records when check re presented Identifies/provides information on return location for customer returns typically BOFD Fields conform to Reg CC requirements Codes indicate institution that truncated original check Selected Cash Letter Records Forward Check Detail Addendum C Record (Type 28) Associated with previous Check Detail Record May contain multiple records for subsequent endorsers Two key purposes Defines bank s role in collection process Subsequent indorsements if additional financial institution(s) handled the item and provided indorsement(s) May carry BOFD indorsement Carries Return Reason When flipped from a prior 35 record on a represented item 7

8 Selected Record Views 31 and 33 Return Detail records contain MICR data Bundle Header (20) X Return Bundle Diagram Return Bundle Return Item(s) Bundle Control (70) LEGEND C M Mandatory Record Conditional Record C Logical Entity Multiple Logical Entities Multiple Conditional Records Return Detail 31 Record Return Detail Add. A 32 Record Return Detail Add. B 33 Record Return Detail Add. D 35 Record Image View 15 One 32 record to identify return location One 33 record if Aux On-Us field One 35 record to identify each subsequent endorser Image View Detail (50) Image View Data (52) Record Types 50 and 52 occur together for each Image View Pair of 50/52 records for front view Pair of 50/52 records back view 16 Selected Cash Letter Records Return Return Record (Type 31) One record for each return Information from Check Detail Record or original check Forward Bundle Date Item Sequence Number Codes to indicate: Return Reason, archive available, number of times returned Return Addendum B Record (Type 33) Used in conjunction with Return Record (Type 31) Contains Auxiliary On Us field Auxiliary On Us: For business sized checks Carried in Check Detail Record (Type 25) in Forward presentment file 8

9 Selected Cash Letter Records Return Return Addendum A Record (Type 32) Record mirrors Check Detail Addendum A Record (Type 26) Type 26 record identifies return location for customer returns Return Addendum D Record (Type 35) Record mirrors Check Detail Addendum C Record (Type 28) Type 28 record identifies and provides information for each endorsing institution and any subsequent indorsement information 17 X Flows Forward Presentment * 26* Bank of First Deposit (BOFD) Intermediary 28 ** Paying Bank 18 Legend: BOFD Lt. Green* Intermediary Blue** Paying Bank Red 9

10 X Flows Return Record/ Return Addendum B Return 31/33 26 * Bank of First Deposit (BOFD) 28** 35 Paying Bank/ Returning Bank 19 Legend: BOFD Lt. Green* Intermediary Blue** Paying Bank Red 26 becomes 32 record 28 becomes 35 record X Flows Return Record/ Return Addendum B Return 31/33 26 * Bank of First Deposit (BOFD) 28** Paying Bank/ Returning Bank New 35 record added 20 Legend: BOFD Lt. Green* Intermediary Blue** Paying Bank Red Note: Return Reason is in 31 & 35 records 10

11 Exceptions 22 Exceptions Exception: Any transaction in the form of a paper, image or electronic entry that requires further investigation before the final disposition of the entry can be decided Adjustments and Returns are exceptions Adjustments Involve research to resolve errors generally caused during item processing Example: Mis encoding, Mis routing, Incorrect posting, etc. Returns An item that is dishonored by the paying bank based on a specific return reason May be Customer Return (e.g; NSF or Stop Pay); or Administrative Reason for Return (e.g.; Image missing, ineligible item or duplicate) 11

12 Return Returns Must Meet regulatory requirements Duplicates Deposit Check Statement 23 Depositing Customer Sub Check Return BOFD Image Adjustment or Image Return Faster Timely Settlement Do not lose right of return With increase in remote deposit capture (RDC), consider returns if unsure of cause of duplicate Returns processed automatically May have negative customer impacts if bank caused the error Depositing customer and/or drawer customer Paying Bank Drawer Customer Adjustment Adjustments: May choose to adjust even if within return deadlines Duplicates Deposit Check Statemen t 24 Depositing Customer BOFD Image Adjustment or Image Return Made to appropriate party Handled bank to bank to minimize negative impact to customers Adjustment areas familiar with process and specific adjustment types Can be less efficient than return With regard to settlement timing / additional required documentation May lose right to return item (due to timing) Significant issue if counterfeit or forged and not simple duplicate error Paying Bank Drawer Customer 12

13 Returns Timing Requirements UCC midnight deadline With respect to a bank, it is: Midnight on its next banking day following the banking day on which it received the relevant item If a Paying Bank settles for a demand item before midnight of the banking day of receipt, it may revoke and recover the settlement if, before made final payment and before its midnight deadline, it: Returns the item Returns an image of the item, in accordance with its agreement; Sends a record providing notice of dishonor or nonpayment if the item is unavailable for return 25 Returns Timing Requirements Reg CC Expeditious Timing Paying Bank determines not to pay a check Must return the check in an expeditious manner Return check 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) Second business day following banking day on which the check was presented to paying bank All checks are considered local today 26 13

14 Customer and Administrative Returns Customer Returns Dishonored item under check law Usually attempted charge to customer account Administrative Return/Administrative reason Return for reason other than dishonored item May be handled internally rather than charge to customer and How to tell which is which? Identification of return type Returns Indicator field; carried in cash letter file Standard recognizes return reason codes may be used for both Customer and Admin returns: Same code Different purposes: I return code for: Customer return = Indorsement missing Administrative return = Image missing Q return code for: Customer return = Not Authorized Administrative return = Ineligible 27 Reasons for Return Common Return Reason Codes Customer Return Reasons NSF Not Sufficient Funds = A Stop Payment = C Closed Account = D Endorsement Missing = I Not Authorized = Q Warranty Breach = 3 Duplicate Presentment = Y Administrative Reasons Image Missing = I Ineligible = Q Unusable Image = U Duplicate Presentment = Y 28 14

15 29 Adjustments By Agreement ECCHO Adjustment Rules and Matrix Apply to Members for image exchange/return activities Rules and related matrix provide timing and other requirements for making adjustment claim Can adjust under ECCHO Rules Whether or not forward or return item exchanged under ECCHO Rules Federal Reserve Operating Circular 3 (OC3) FRBs Check Adjustments Services Operations Resources provide: Reporting timeframe Requirements for adjustment request through FRB Specific adjustment types, related timing, documentation (DTF) requirements, etc. Item must be exchanged forward through the Fed to adjust through the Fed Adjustments ECCHO Rules Agreements Agreements Adjustment Claim Adjustment Claim 30 Member Sending Adjustment Adjustment Provider Member Receiving Adjustment Must comply with Rules and requirements of Adjustment Matrix in Exhibit II Liability of Adjustment Claim Rules do not establish liability between members Member may make claim to: Other ECCHO Member or via Adjustment Provider Members have agreed to use Participation voluntary 15

16 Adjustments ECCHO Rules Time Periods/Processing Requirements Documentation for Claims Follow the matrix for each type of claim Settlement: Members agree to settlement process Settlement timing: With entry and without entry Compensation Not covered under these rules Savings Bonds Subject to correction/adjustment from Treasury Section Required use of adjustment with entry for Savings Bonds Adjustment Provider Relationship Notification of Receipt Rejection of Claim / Notification May reject claim if: Does not comply with Adjustment Matrix Does not relate to item handled by Member receiving claim Is duplicate of previous claim pending or one Member already initiated Factual basis for claim is not established May not reject RCC claim on alleged authorization 31 Fed and ECCHO Adjustments Adjustment types similar but different names Fed and ECCHO $ minimum the same in many cases Timing for with entry claim can be similar, but... Can be different for the same adjustment type Timing Same Day Entry Fed Adjustment ITYP ECCHO Adjustment Reason Timing With Entry 6 months PAID Duplicate Item 180 calendar days 6 months ENC Amount Error Legal Amount 180 calendar days 20 business days NCH/NCI Non negotiatable Item / Non Cash Item 90 calendar days Initiated at behest of BPD when it determines a bond was redeemed / processed for an incorrect amount PEA Pricing Error Adjustment N/A *Deadline not applicable since ECCHO Member did not receive forward or return item 90 calendar days WIC/URCC Unauthorized RCC Warranty Claim 90 calendar days 32 16

17 Top Five Adjustment Types Top five types of adjustments as reported by the Fed (2015) Three adj types account for over 90% of cases received PAID adjustments are now 41% of all Fed adjustment cases Source: Federal Reserve Retail Payments Office (RPO) Top Five Adjustment Types PAID: Duplicate paid item Request for credit when both items have been paid ENC: Encoding error Amount different than legal (written) amount; or Written amount differs from the stated cash letter / return letter amount NCH: Noncash item Includes MICR Mismatch and NCI WIC/URCC Unauthorized Remotely Created Check claim URCC Warranty claim for the RCC WIC Warranty Indemnity Claim being a Check 21 WIC claim 17

18 Common Exchange Scenarios Non Conforming Image Types of NCIs Poor Quality Or Unusable Image Image it too dark, too light, skewed, etc. Mismatched MICR Image integrity issue Missing or Incorrect Endorsements May Be Caused By: Capture issues or equipment/maintenance issues Remote Deposit Capture introduces new customer equipment/processes that may need additional controls Lack of proper training 36 18

19 Mis matched MICR MICR Data and Check Image Do Not Match Mismatch on: Account number Check number & amount 37 Mis matched MICR MICR Data and Check Image Do Not Match 38 Mismatch on: R/T number Account number Check number & amount 19

20 Positive Pay Image ABC Company Equals BOFD Paying Bank Issue File Payee Positive Pay Savvy Customer Note: Banks are all members of same clearinghouse 39 Duplicates What Causes Duplicate Claims? Paper and early image processes: Internal bank duplicates Caused inside banking system No HIDC outside of banking system Current environment: Remote deposit capture (RDC) More duplicates as result of: Unintentional Errors or Fraudulent Intent RDC duplication different from past experience Process generally outside control of banks RDC and Mobile RDC Customer scans check or snaps picture with mobile phone Customer retains the original paper Original may get back into the payment stream Holder in Due Course (HIDC) may have original check Often will demand payment from Drawer 40 20

21 41 Duplicate Warranty Intended to protect Receiving Bank regardless of form of duplicate item (e.g., image, IRD, ACH conversion, etc.) Reg CC, ECCHO Rules, Reg J (referenced by OC3) have similar duplicate warranties Excerpt from ECCHO Rules (Section XIX(L)(7)) Sending Bank warrants to Receiving Bank with respect to each Electronic Image will not. be asked to make a payment based on an item that it already paid; Warranty limited to situation where Receiving Bank pays item already paid NACHA rules have similar provisions for check conversion Rules Coverage Scenarios Note: Banks are all members of same clearinghouse Statement Agreement BOFD A Statement Remote Deposit Customer Paying Bank Drawer Customer 42 21

22 Rules Coverage Scenarios Note: Banks are all members of same clearinghouse Electronic Endorsement RT # of BOFD A Statement Agreement BOFD A Statement Sammy Shyster (ICL) Paying Bank Drawer Customer BOFD B Physical and/or Electronic Endorsement RT # of BOFD B 43 Rules Coverage Scenarios Warranty limited to situation where Receiving Bank pays item already paid No warranty not applicable where Receiving Bank returned and reversed settlement of first item, then receives second item NOT a Duplicate Receiving Bank only paid single item Remote Deposit Check Sub Check Return NSF Image Return Depositary Bank s Customer Original Check Re-presentment Re-presentment BOFD A Adjust as Duplicate Paying Bank Drawer Customer 44 22

23 Rules Coverage Scenarios BOFD A Return/Adjust as Duplicate Either/Or Return/Adjust as Duplicate 45 BOFD B Paying Bank can go back to either BOFD A or BOFD B Both made the same no double debit warranty on the image Paying Bank Claim Between BOFDs Is there basis for claim between BOFDs? Paying Bank BOFD A 46 BOFD B Return/Adjust as Duplicate No Rules and check law do 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 23

24 47 Proposed Reg CC Change Truncating Bank Indemnity New indemnity by BOFD A to BOFD B BOFD A is truncating bank Did not receive original check Receives settlement or other consideration Does not receive check returned unpaid BOFD A s potential liability arises when it permits customer to truncate check and deposit image Customer retains original check and may intentionally or mistakenly deposit paper check in another bank 48 Proposed Reg CC BOFD B receives indemnity from BOFD A if: Receives deposit of original paper check Not through RDC May make claim against BOFD A Claim made to any truncating bank, even if multiple truncating banks Indemnification claim only exists for losses if check returned to BOFD B due to already paid Proposed language currently doesn t say adjust Fed s Rationale: BOFD A permitted customer truncation Received benefit from offering customer RDC In best position to correct situation Should internalize risk or cost to other banks Allows BOFD A to allocate loss to its depositing customer by agreement 24

25 Proposed Regulation CC RDC Agreement BOFD A Indemnity Claim Agreement Mobile Deposit Customer BOFD B Return as Duplicate Paying Bank 49 Holder in Due Course (HIDC) 25

26 Holder in Due Course Holder in Due Course (HIDC) (UCC 3 302) Holder who took the instrument o In Good Faith o For Value o Without notice the signature is unauthorized or item altered o Without knowledge of claims against it Not every holder qualifies as HIDC; Depends on facts and circumstances HIDC concept Represents chain of ownership No other payment system has this Benefit of being the HIDC Can enforce item against drawer even if item was returned unpaid by Drawee (Paying Bank) 51 Holder In Due Course Claim (1) Goods Purchased (3) Chargeback XAttempt; Payee Closed Account (1) Check Deposited Image Drawer (2) Goods found to be fraudulent SalesPerson / Payee / Depositor Bank of First Deposit (BOFD) (4) BOFD /HIDC Claim (2) Drawer issues Stop Pay order Image Returned (3) Paying Bank Depositary Bank (BOFD) is Holder In Due Course Can make claim back to Drawer 52 26

27 53 HIDC Scenario Check Casher took check in good faith without knowledge of issue with check Is Holder of item, Has original item Paying Bank returns or adjusts item back to BOFD B, who charges check casher Paying Bank could make claim to either BOFD B or BOFD A under the image warranties Check Casher makes claim directly to Drawer as allowed under UCC With demand letter outside banking system Can only make to drawer Drawer already paid item (posted to its account at Paying Bank), but... Pays Check Casher due to fear of potential bad credit Drawer requests reimbursement from Paying Bank for item it already paid (paid twice for the same item) Paying Bank can make claim to BOFD A under duplicate warranty HIDC Scenario (ICL) RDC Agreement BOFD A Adjust Duplicate Statement Cashes Check (ICL) Statement Customer Check Casher HIDC Charge Account BOFD B Return or Adjust $$$ Duplicate Bank Reimburse Drawer Drawer Paying Bank Drawer Pays HIDC Claim HIDC Claim 54 27

28 Addressing HIDC Issues Alternative A Agreement BOFD A Return or Adjust Duplicate Statement Charge Account Return or Adjust as Duplicate Sammy Check Casher - HIDC Informs Bank is HIDC BOFD B Reject Claim Paying Bank 56 28

29 Alternative B Agreement BOFD A Statement Check Return or Adjust as Duplicate Sammy Check Casher BOFD B - HIDC Paying Bank 57 Summary HIDC Alternatives ECCHO membership discusses solutions to issues; Some recommendations result in Rules and/or commentary updates Subcommittee developed Improving Duplicate Payment Adjustment Resolution An ECCHO Suggestion Document (Jul 2014) Provided as a handout for today s session Originally, banks went to BOFD B on duplicates Now banks making claims to BOFD A, depending on scenario Fed proposing changes to Reg CC Truncating Bank indemnity 58 29

30 Questions Other Resources X9 standards: catalog/ CheckImage Central: ECCHO Education: ECCHO Rules: ECCHO FAQs: Numerous questions answered on the following topics: ECCHO FAQ Topics Duplicates Returns Fully Qualified Items Repair Retention Requirements Dispute Resolution Indorsements Rules Coverage Rule 8 Eligible Items Rule 9 ECCHO Rules and Check Law Not Our Item Quality Mis Matched MICR Item Copy and Sufficient Copy Presentment Statute of Limitations 30

31 November 9, 2015 ECCHO Education Programs Ellen Heffner Thank You! Electronic Check Clearing House Organization (ECCHO) 3710 Rawlins Street; Suite #1075 Dallas, TX Phyllis Meyerson APPENDIX A 31

32 Fully Electronic Check Check expected to be a writing a physical item that is then imaged for collection as check image, but Technology permits formatting electronic record as if it were an image of a paper check Results in creation of fully electronic check or a check that never existed in paper form 63 Legal Requirements for Checks UCC Article 3: For check to be a negotiable instrument, item must be: An order to pay Fixed amount of money Meet certain other requirements ORDER further defined in UCC as...written instruction to pay money signed by the person giving the instruction. WRITTEN further defined in UCC as requiring... reduction to tangible form. Reg CC: Definition of check Refers to UCC definition of negotiable demand draft that is drawn on or payable through a bank Expressly contemplates the check image used to create substitute check arose from original paper check 64 32

33 Fully Electronic Check Creates and Transmits Image 65 Appendix B 33

34 Build the ICL Overview 67 Which Electronic Records? Processes 1 3: Deposit and image presentment (1) Image return (2) Image re presentment (3) BOFD A may represent item automatically What X9 record types required: 1. Initial image presentment? 2. First return? 3. Re presentment? Processes 4 6: Second image return (4) BOFD A provides a substitute check to customer Customer re deposits substitute check at 2nd depositary bank BOFD B (5) BOFD B presents item as image (6) What X9 record types required: 4. Second return? 6. Presented image from BOFD B to Paying Bank? 68 34

35 Which Electronic Records? Answers Forward Presentment and Initial Return Processes 1 3: Deposit and image presentment (1) Image return (2) Image re presentment (3) X9 record types required: Initial image presentment (1) Type 25 Type 26 First return (2) Type 31/33 (33 only if aux on us from business sized check) Type 32 flipped from 26 record Type 35 New record to carry Return Reason Code Re presentment (3) Type 25 Type 26 flipped from 32 record on first return (2) Type 28 flipped from 35 record on first return (2) Type 26 New for second presentment (3) 69 Which Electronic Records? Answers Second Return and Re Presentment Processes 4 6: Second image return (4) BOFD A provides a substitute check Customer re deposits substitute chk at 2nd depositary bank BOFD B (5) BOFD B presents item as image (6) X9 record types required: Second return (4) Type 31/33 (33 only if aux on us from business sized check) Type 32 flipped from first 26 record (1) Type 32 flipped from second 26 record (3) Type 35 flipped from first 28 record (3) Type 35 New record for this return (w/current return reason code) Substitute Check deposited at BOFD B (5) Item has been dropped to paper when IRD created Substitute check (IRD) carries all prior indorsements Image presented from BOFD B (6) Type 25 New Type 26 New w/bofd B indorsement information 70 35