Managing Risks Around Electronic Checks No Laws or Regulations!

Transcription

1 November 15, 2017 Managing Risks Around Electronic Checks No Laws or Regulations! NEACH Big East Banking Conference

2 Disclaimer This session provides an overview of various aspects of the check payments systems including legal and rules framework for check image exchange. Responsibility for compliance with image exchange rules and/or 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. 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. 2

3 Session Overview ECCHO Overview Highlights of Final Regulation CC and Proposal Electronic Check and Electronic Returned Check Definition Warranties Expeditious Return Notice of non-payment and in-lieu of return New Indemnifications Electronically Created Item Remote Deposit Capture RFC on Presumption of Alteration Check Trends 3

4 ECCHO Overview Electronic Check Clearing House Org Not-for-profit, created in 1990 Owned by its membership Current membership approximately 2,800 Every depository financial institution is eligible for membership Only DFIs are eligible for membership All ECCHO members have equal coverage under rules Only national private sector Image Rules Organization Vendor and solution independent Rules designed to work with all solutions ECCHO Rules apply to Check Image Exchanges between ECCHO Members Three functions Rules, Advocacy and Education NCP Program 4

5 5 Regulation CC Background Fed issued Requests for Comment on changes to Regulation CC in 2011 and 2014 Fed amending Subparts C and D of Regulation CC to facilitate banking industry s ongoing transition to fully-electronic check collection and return process Issued May 31, 2017 Takes effect on July 1, 2018 Final Rule and overview can be found at Also requested comment on presumption of alteration for certain disputes Proposed revisions to Subpart B remain outstanding Joint authority with Fed and CFPB over Subpart B

6 Regulation CC Highlights Extends Reg CC Coverage to Electronic Checks Images of original paper checks Forward collection and unpaid returns Creates New Warranties for Electronic Checks No duplicate payments Information accurately represents all of the information from front and back of paper check 6

7 Electronic Check Definition Electronic Check and Electronic Returned Check An electronic image of, and electronic information derived from, paper check or paper returned check Exchanged under an agreement between banks Conforms with ANS X or banks can agree to other standard Check image and information must be derived from paper check Image must be created from paper item ECIs (defined below) are not electronic checks Electronic check/electronic returned check now subject to Regulation CC, Subpart C 7

8 Regulation CC Highlights Expeditious Returns Shifts liability from paying bank to BOFD if BOFD does not arrange for return of checks electronically by commercially reasonably means Applies to paper checks and electronic checks 8

9 New Expeditious Return Rule Modified Version of Current Test Requires all returned checks, both paper and electronic, to satisfy modified version of current two-day test for expeditious return Paper and electronic checks must be returned to depositary bank (i.e., BOFD) such that Would normally be received by depositary bank by 2:00 p.m. on second business day following banking day on which check was presented to paying bank Previously was 4:00 p.m. New Commentary: To determine normally paying bank may rely on returning bank s return deadlines and availability schedules for electronic return 9

10 Expeditious Return Deadline Monday Tuesday Wednesday Thursday Depositary Bank Paying Bank Paying Bank Depositary Bank Returns Checks Deposited Checks Presented Return Candidates Identified Returns Received by 2 pm Post Post Checks Posted Return Decisions Returns Initiated If >$5000 Notice of Non-payment By 2:00 p.m. 10

11 New Expeditious Return Rule Limits on Paying Bank Liability No liability for failure of expeditious return for certain arrangements Provides liability protection if depositary bank does not have appropriate electronic connection Depositary bank must have arrangements for return of checks electronically by commercially reasonable means Encourages depositary bank to accept electronic return checks Burden of proof on depositary bank 11

12 Regulation CC Highlights Notice of Non-Payment Increases dollar threshold to $5,000 from $2,500 Accelerates time of receipt from 4:00 pm to 2:00 pm local time Applies to paper checks and electronic checks 12

13 Electronic Created Item New Indemnities for Electronically Created Items (ECIs) Covers Losses Caused by: ECIs not derived from a paper check ECIs not authorized by account holder Subsequent bank pays an item already paid Other Risk Considerations Could include Reg E losses incurred by paying bank Indemnity shifts losses to depositary bank ECI is not an electronic check under rule ECIs not eligible for image exchange under check rules Not subject to other provisions of Reg CC 13

14 CHECK WRITER DEPOSITOR CHECK WRITER Electronically Created Item ECI Remittance Data Image RDC COLLECTING BANK (BOFD) Image INTERMEDIARY BANK Image PAYING BANK What is an ECI? Electronic Image that has all attributes of electronic check/electronic returned check but was created electronically and not derived from paper check Also know as: Electronic Payment Order (EPO) Statement Image 14 Never existed in paper form and does not meet Reg CC definition of electronic check ECI cannot be used to create substitute check that is legal equivalent

15 15 ECIs Going Through System Not Eligible Items under ECCHO or Fed Rules Flow and indorsement same as images of paper checks for forward presentment and returns But Currently Flowing Through Check System New electronic products-many don t understand that these items are not permitted About.4% of Items are ECIs According to High-Level ECCHO Study.4% is greater than return rate More volume than IRDs

16 ECI Covered/Not Covered Reg CC ECI Indemnity is Good Start Intended to protect paying bank Moves Key Questions to Agreements (e.g., ECCHO, OC3, clearing house, bilateral, etc.) Reg CC Does Not: Specify how to identify ECIs Provide specific return reason code for ECI can return as ineligible item Provide adjustment process Require expeditious return 16

17 Regulation CC Highlights New Indemnity for Duplicate Payment Arising from RDC Intended to protect a 2 nd BOFD that receives a paper check that is subsequently returned because the check previously deposited at another bank via RDC BOFD with paper can recover from RDC bank Permits depositary bank that accepts original paper check to make claim against depositary bank that permitted customer to truncate Claim can be made to any truncating bank, even if multiple truncating banks 17

18 Remote Deposit Capture New Indemnity 1) BOFD A is a truncating bank : 2) Does not receive an original check; 3) Receives settlement ; and 4) Does not receive return of check unpaid RDC Agreement IMAGE BOFD A IMAGE $$$ Indemnity Claim Agreement IMAGE 18 Remote Deposit Customer BOFD B Return as Duplicate Paying Bank

19 Remote Deposit Capture Indemnity Claim RDC Agreement IMAGE BOFD A IMAGE $$$ Indemnity Claim Agreement IMAGE Remote Deposit Customer BOFD B Return as Duplicate Paying Bank 19 1) BOFD A is an RDC bank & makes indemnity; 2) BOFD B accepts original paper for deposit; and 3) BOFD B receives a return unpaid

20 Remote Deposit Capture IMAGE RDC Agreement BOFD A Claim IMAGE $$$ IMAGE RDC Agreement BOFD B o r Adjust or Claim as Duplicate (not return) $$$ Indemnity? Claim Agreement IMAGE 20 Remote Deposit Customer BOFD C Return as Duplicate Paying Bank

21 RDC Making Claim Who Can Make Claim? Indemnified bank (accepting original paper check) can make claim against RDC bank that permitted customer to truncate How to Make Claim? Final Rule does not: Provide instruction on how to make claim to RDC bank Address how indemnified bank can identify RDC bank 21

22 RDC Making Claim Fed Left Many Issues For Banks to Determine Use return code/return system? Use adjustment code/adjustment system? Timing/deadlines for claims? For info requests? How get all info you need? Who RDC bank was? Proof the indemnified bank actually has original item? Within indemnified bank, get paper where it needs to go? 22

23 Other Highlights Rejected Deposit Bank that rejects check submitted for deposit (i.e. ATM) may send customer substitute check Bank makes Check 21 warranties and indemnification, regardless of whether bank received consideration for substitute check Same Day Settlement Retains current SDS rule and only applies to paper presentment Settlement of presentment of electronic checks governed by agreement of parties Indorsements Eliminates Appendix D Indorsement, Reconverting-Bank Identification and Truncation Bank Identification Standards Refer to X9 industry standards for indorsement for paper check (X ), substitute check (X ) and electronic check (X ) 23

24 Request for Comment Presumption of Alteration Requested comment whether Regulation CC should adopt evidentiary presumption as to whether, in cases of doubt, check should be presumed to be altered rather than forgery Dollar amount or payee on substitute check or electronic check Presumption may be overcome by preponderance of evidence that check was forged or is as issued by drawer Presumption does not apply if original check is made available Also considering Whether alteration presumption should apply to claim that date of check was altered Whether presumption should apply if bank claiming presumption destroyed original check 24

25 Request for Comment ECCHO Comment Letter ECCHO facilitated industry discussions and provided industry comment letter to Fed on August 1, 2017 Industry group letter supported presumption Note: ECCHO Rules include a similar provision for past several years 25

26 In $ Billions US Check Vs. World GDP* $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $ GDP Comparisons U.S. GDP is approximately 172% of the 2 nd largest economy GDP Gross Domestic Product is the monetary value of all finished all goods and services 26 *Source: GDP Bureau of Economic Analysis, Dept of Commerce

27 $ in Trillions GDP Checks Paid $ Amount of Checks vs. GDP $30.0 $27.3 $27.4 $25.0 $20.0 $18.0 $18.6 At $27.4 Trillion, Checks Totaled 147% of U.S. GDP in 2016! $15.0 $10.0 $5.0 *GDP- Gross domestic product is the monetary value of all finished goods and services. $ *Sources: GDP Bureau of Economic Analysis, Dept of Commerce - Check Image Collaborative

28 In $ Billions U.S. Checks 2016 US Check Vs. World GDP* $30,000 $25, GDP Comparisons $20,000 $15,000 Aggregate GDP of These 7 Countries = < U.S. Check Dollars $10,000 $5,000 In 2016 UK Faster Payments Totaled $1.5 Trillion or 5.5% of U.S. Check Dollars $- 28 *Sources: GDP Bureau of Economic Analysis, Dept of Commerce and 2016 Federal Reserve payments Study

29 Volume in Millions Trends in Transit Checks 18, , B 14.69B 14, , B 12.85B 12.52B Change in Annual Transit Volume 10, , to % 2013 to % 2014 to % 2015 to % 6, , ,000.0 Jan Apr: 2016 to % Jan Jun Volume: 2016 to % *Source Check Image Central

30 Dollars in Billions Trends in Transit Check $s $20,000 $15,000 $10,000 $5,000 $21.4T $20.4T $19.1T $19.3T $19.4T Change in Annual Transit Dollars 2012 to % 2013 to % 2014 to % 2015 to % Jan Apr Dollars: 2016 to % Jan Jun Dollars: 2016 to % $ *Source Check Image Central

31 31 Wrap-Up and Questions

32 Thank You! David Walker ECCHO Electronic Check Clearing House Organization