LIVING POWERPOINT. Ellen Heffner ECCHO Copyright 2015 by the Electronic Check Clearing House Organization

Transcription

1 October 8, 2015 LIVING POWERPOINT Phyllis Meyerson ECCHO Ellen Heffner ECCHO Copyright 2015 by the Electronic Check Clearing House Organization

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 3 ECCHO Overview Duplicates Overview Holder in Due Course Living PowerPoints: Duplicates Simple Sammy Scenario Hounding Holder in Due Course BOFD B Bounces Playing Nice in the Sandbox To Return or To Adjust Man in the Middle Conclusions

4 ECCHO Overview

5 ECCHO: Who We Are Electronic Check Clearing House Organization Created in 1990 to facilitate check electronification Owned by membership of approx. 3,000 FIs All depositary financial institutions are eligible for membership For more info: 5

6 ECCHO: What We Do Electronic Check Clearing House Organization Provide private sector image check exchange rules Make image exchange fair among all members Advocate for the check industry: Reg CC changes, not to ban RCCs, Check 21, etc. Seek to make check payment system as electronic, effective and efficient as possible Provide check education for the industry Provide NCP certification for the industry ECCHO works for its members Not for profit. 6

7 NCP National Check Professional April 16 May 7, 2016 Exam Window 120 multiple choice questions Training through partners like UMACHA Just finished fifth exam class Currently 519 NCPs; over 1,000 registered since inception 7

8 Duplicates Overview

9 About Duplicates Is your organization experiencing duplicates? Do you wonder about the best way to handle them? Today, suggested solutions will come to life but first a brief overview 9

10 Current Environment Increasingly checks are deposited via image Duplicates were once bank errors now mainly RDC duplicates often outside control of banks 2 Main causes of duplicates: Errors (Sammy Stupid, Spouse Stupid) Fraud (Sammy Shyster) 10

11 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 (OC3 uses Reg J) have similar duplicate (already paid) 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; Word duplicate not there 11

12 Duplicate Warranty No duplicate warranty exists on original paper item Warranty limited to situation where Receiving Bank pays item already paid Duplicate warranty does not apply to represented items that were not paid the first time 12 NACHA rules have similar provisions for check conversion

13 Different Indorsements Early on ECCHO was asked if different indorsements indicate a duplicate? From same original check = Yes, a duplicate From two different checks = Not a duplicate Two different indorsements not necessarily indicative of a duplicate Additional review and investigation needed Reconstruct what happened What are the facts? Consult legal 13

14 BOFDs Subject to Claim BOFD A Return/Adjust as Duplicate Either/Or Return/Adjust as Duplicate BOFD B Paying Bank C Paying Bank can go back to either BOFD A or BOFD B 14

15 Represented Duplicate Warranty 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 Deposit Chk Sub Chk Return NSF Image Return Original Chk Representment Representment 15 BOFD A Adjust as Duplicate NOT A Duplicate Paying Bank

16 No Claim Between BOFDs Currently, BOFD B does not have a claim against BOFD A BOFD A BOFD B Return/Adjust as Duplicate Paying Bank C 16

17 Claim Between BOFDs Since no image exchange between BOFDs, no warranty is made Warranties arise from exchange Consult legal counsel to understand situation Gentlemen s Agreements Form relationships with FIs with which you regularly exchange images Communicate issues, compromise, play nice in the sand box Fed proposing changes to Reg CC 17

18 Proposed Reg CC Change Truncating Bank Indemnity RDC Agreement BOFD A Indemnity Claim Agreement Remote Deposit Customer BOFD B Return as Duplicate Paying Bank 18

19 Proposed Reg CC Change 19 Truncating Bank Indemnity would permit BOFD B, that deposits original paper check, to make claim against BOFD A Claim made to any truncating bank Claim only exists if check returned to BOFD B due to already paid Language currently doesn t say adjusted Allows BOFD A to allocate loss to its depositing customer by agreement Fed s Rationale BOFD A permitted customer truncation, receives benefit from customer RDC, and is in best position to correct situation It should bear risk or cost to other banks

20 Holder in Due Course (HIDC)

21 What is HIDC? Holder: Person that comes into possession of negotiable instrument Holder in Due Course (HIDC): Holder that takes check for value, in good faith and without notice check is overdue or been dishonored Not every holder qualifies as HIDC Depends on facts and circumstances HIDC may make claim against drawer regardless of certain defenses 21

22 New Issue: HIDC Claims Recently HIDC claims have arisen from customer RDC duplicates More challenging duplicate issue because: Caused from outside banking system by customer not a depositary FI Potentially harder to make right HIDC may have original check and may demand payment from drawer Duplicate warranty covers HIDC duplicate warranty claims 22

23 Review: Steps of HIDC Scenario 23 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 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 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 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 duplicate warranty

24 HIDC Scenario Agreement (ICL) Adjust Duplicate Statement BOFD A (ICL) Statement Customer Check Casher HIDC Charge Account BOFD B Return or Adjust Duplicate Paying Bank $$$ Bank Reimburse Drawer Drawer Drawer Pays HIDC Claim 24 HIDC Claim

25 Addressing Duplicates

26 ECCHO Membership 26 ECCHO membership discusses solutions to issues Industry experts share ideas on how to address issue Some recommendations result in Rules or commentary changes Subcommittee developed Improving Duplicate Payment Adjustment Resolution An ECCHO Suggestion Document Originally, banks went to BOFD B on duplicates Now banks making claims to BOFD A, depending on scenario Avoid HIDC claims to Drawer Exceptions discussed and determined should be sent to BOFD A BOFD A s customer did not secure original Following are procedural suggestions

27 Living Power Point An Original Play Welcome our Radically Duplicate Check (RDC) Players

28 Disclaimer The events, characters and organizations depicted in this skit are purely fictional. Any resemblance or similarity to any actual events, organizations or persons living or dead is entirely coincidental. 28

29 Starring Andy Barlow - WACHA Sue Bork-Ditlefsen - Bremer Angi Farren - UMACHA Ellen Heffner - ECCHO Fred Laing UMACHA Mitch Kenady - UMACHA Phyllis Meyerson - ECCHO Jordan Morell UMACHA Jessica Perkins First Premier Kyle Poturica Wells Fargo Jen Wasmund - UMACHA Produced: Ellen Heffner - ECCHO Written and Directed: Phyllis Meyerson - ECCHO 29

30 Simple Sammy Scenario

31 Intermission

32 Act 1: Simple Sammy Duplicate BOFD A Return/Adjust as Duplicate Sammy BOFD B Paying Bank 32 32

33 Hounding Holder in Due Course

34 Intermission

35 Act 2: Hounding HIDC Adjust Duplicate Statement Agreement BOFD A $$$ Charge Account Return or Adjust as Duplicate Bank Reimburse Drawer Sammy Check Casher HIDC BOFD B Paying Bank Drawer Drawer Pays HIDC Claim HIDC Claim 35

36 BOFD B Bounces

37 Intermission

38 Act 3: BOFD B Bounces 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 38 38

39 Playing Nice in the Sandbox

40 Intermission

41 Act 4: Nice in the Sandbox Agreement BOFD A Statement Check Return or Adjust as Duplicate Sammy Check Casher BOFD B - HIDC Paying Bank 41 41

42 Advantages to Suggestions 42 Avoids complications of HIDC claims and subsequent warranty claims Eliminates drawer/customer receiving direct claim from HIDC Handled within banking system Speeds claims process Seems fair for BOFD A to bear risk of loss from double payments BOFD A introduced risk by allowing customer to engage in remote deposit capture Their customer did not secure original paper BOFD A in best position to collect on claim from customer based on customer s agreement

43 To Return or To Adjust (To Be or Not to Be)

44 Intermission

45 Act 5: To Return or To Adjust BOFD A /Return /Adjust Return or Adjust as Duplicate? Paying Bank 45 45

46 Returns vs. Adjustments Duplicate Deposit Ck Sub Ck Depositing Customer Sub Ck Return or Image Adjustment Drawer Customer BOFD Image Return Paying Bank Duplicate and Deposit Ck Sub Ck Depositing Customer Sub Ck Return or Image Adjustment Drawer Customer BOFD Image Return Paying Bank 46 Duplicate Detection 46

47 To Return Duplicates typically affect innocent parties Decision to return or adjust at discretion of bank Bank performs its own risk analysis Encouraged to seek legal counsel on potential legal risks Returns Benefit - Do not lose right of return Significant issue if item is counterfeit or forged and not duplicate Benefit - Faster Timely Settlement May have negative impact on innocent parties (depositing customer and drawer customer) May have personnel not familiar with process Note: Use correct return reason code for Duplicate May avoid some negative impact 47

48 To Adjust 48 Adjustments Made to appropriate party Minimum negative impact to customers Handled within banking system Personnel familiar with process Historically resolve these issues Less efficient than returns Slower - Less timely settlement More paperwork May have dollar limits, fees associated with adjustments Due to timing may lose right to return item Waived right to return within midnight deadline Significant issue if item is counterfeit or forged and not duplicate

49 Man in the Middle

50

51 Intermission

52 Act 6 Man in the Middle Deposit Ck Image Intermediary Bank Image Sub Ck Return NSF Image Return Valley Sally (Stupid) Original Ck Representment Image Representment Adjust as Duplicate BOFD Intermediary Bank Paying Bank 52

53 Paying Bank: Jordan Morell BOFD A: Fred Laing BOFD B: Jen Wasmund Sammy Andy Barlow Check 1/Pretty Pink Check: Angi Farren Check 2: Kyle Poturica Check Casher/Intermediary Bank: Jessica Perkins Drawer/Sally: Sue Bork-Ditlefsen Return: Phyllis Meyerson Adjust: Ellen Heffner Understudy and Prop Master: Mitch Kenady Written and Directed: Phyllis Meyerson

54 Conclusions

55 Protecting Against Dupes Integrate RDC and duplicate detection systems Proof items Know your customer Sound, updated customer agreements Secure the paper, timing of destruction Restrictive indorsements: For Deposit Only RDC Daily/monthly deposit limits Increasing limits over time for good customers Customer education and training treat phone like a computer Repeat info to customer throughout the process 55

56 Summary 56 Increasing issue with duplicates originating from remote deposit - mainly from consumer customers Some errors; some fraud Duplicate warranties protect against paying an item that has already been paid Sending bank warrants to receiving bank that it won t be asked to make a payment on item already paid Paying Bank can make claim to BOFD A or BOFD B (from our example) Duplicates can be equitably handled within the banking system

57 Summary Recent HIDC claims are different because they are outside of the banking system (not depositary institutions) Therefore generally handled with demand letter (sent directly to drawer customers address on check) Fed has issued proposed changes to Reg CC Proposal is Truncating Bank Indemnity which would permit BOFD B, that deposits original paper check, to make claim against BOFD A in case of duplicate return This is currently not law Use communication and gentleman s agreement to accomplish similar result 57

58 Additional Information 58 For additional information please see the following ECCHO Operating Rules and Commentary Regulation J Regulation CC Joint Comment Letter FIs offering RDC should review and implement FFIEC guidance on RDC which addresses FI responsibility to identify and control risks White Papers Currently Available: A Guideline Document on Duplicate Image/IRD Prevention and Detection Additional Issues Regarding Possible Duplicate Payment of Check items Avoid Duplicates! Improving Duplicate Payment Adjustment Resolution An ECCHO Suggestion Document Resolving Duplicates as Adjustments versus Returns Living Power Point Video -

59 October 8, 2015 Thank You Phyllis Meyerson Ellen Heffner Electronic Check Clearing House Organization