United States: Regulation CC Amendments Reallocate Risks Of Remote Deposit

Last Updated: July 26 2017
Article by John ReVeal

More than three years after proposing amendments to Regulation CC to add new indemnities for remotely deposited checks, new warranties for electronic checks and electronic returned checks, and new indemnities for electronically-created items, the Federal Reserve has at last issued final rules. These new rules also modify the expeditious return rules, including by making electronic returned checks subject to those requirements. The final rules were issued on May 31, 2017, and will take effect on July 1, 2018.

Remote Deposit Indemnities

Perhaps the rules of most importance to the banking and emerging payments industries are those providing for indemnities for remotely deposited checks. An inherent problem with remote deposits is that the person depositing the check retains the original paper check and can negligently or intentionally deposit or cash it again. The bank on which the check is drawn will usually refuse to pay it twice, as it should. This leaves the writer of the check, the bank that accepted the remote deposit, and the bank or check cashing store that accepted the original paper check arguing over who should take the loss. Under current rules, unless the parties have entered into side agreements to allocate losses, the bank or check store paying the original check can normally bring a UCC holder-in-due-course claim against the check writer and that person has no remedy unless recovery is possible from the negligent or crooked payee that cashed the item twice.

Under the new rules, a bank that accepts the remote deposit indemnifies the bank that receives a deposit of the original paper check if it is returned unpaid because it was previously paid by the drawee bank. The Federal Reserve's basic rationale for this loss allocation is that the remote deposit bank is in the best position to prevent multiple deposits of the same item. One could argue that the second bank could have avoided the loss by waiting to pay the check until after the drawee bank had a chance to return the item unpaid, but that is an impractical solution for check cashing stores and other non-banks whose customers are often paying a fee to cash the check and expect to walk out of the store with cash in hand. The rule therefore shifts the risk of loss to the remote deposit bank. When the check cashing store deposits the check at its bank and that bank does not get paid on the check by the drawee bank because the check has already been paid, the check cashing store's bank will be able to recover from the remote deposit bank under the new rules.

The final rule improves on the 2014 proposal, however, by adding a measure of protection for the remote deposit bank. Under the final rule, a bank accepting the original check for deposit cannot make an indemnity claim if the check has a restrictive indorsement that is "inconsistent with the means of deposit." The Federal Reserve suggests in Supplementary Information for the final rule that an indorsement such as "for mobile deposit only" could be an appropriate restrictive indorsement for this purpose.

While this limit on indemnification offers some protection for remote deposit banks, improvements in technology might be needed before a restrictive indorsement is fully workable in the consumer context. A bank can require its commercial remote deposit customer to use check scanning equipment that automatically prints the restrictive indorsement on the check, and the bank can implement corresponding systems to scan for this indorsement and to reject remotely deposited checks that do not include it. In the consumer context, however, most or all depositors will be hand writing this indorsement on the check, which could present a challenge for the automated systems that would need to read the scribbled indorsement. As is often the case with new financial services regulation, these rules will create new opportunities for vendors. Aside from technological changes, banks should consider amendments to their remote deposit agreements to require each remote depositor to include the restrictive indorsement on the check so that the bank then has a clear contractual right of recovery against the customer that fails to do so.

Finally, while Regulation CC has traditionally relied on a series of warranties by the parties presenting checks and electronic images, the remote deposit bank will be indemnifying the bank that incurs losses for accepting the original paper check for deposit. The amount of the indemnity will be limited to the total of (1) the amount of the loss of the indemnified bank, up to the amount of the settlement or other consideration received by the indemnifying bank, and (2) interest and expenses of the indemnified bank, including costs and reasonable attorney's fees and other expenses of representation. However, if it turns out that the indemnified bank has acted negligently or in bad faith, the indemnity amount will be reduced in proportion to the amount of negligence or bad faith attributable to the indemnified bank. The rule thus incorporates a comparative negligence standard that might sometimes limit the losses of the remote deposit bank, as well as the losses of the remote depositor in those cases where the bank has the right to pass its losses to its customer.

Additional Regulation CC Amendments

The Regulation CC amendments also include new warranties for "electronic checks" and "electronic returned checks," add indemnities for "electronically-created items," and adjust the expeditious return rules for all checks, both paper and electronic.

Under current Regulation CC, the various check collection rules of subpart C apply only to paper checks. The new rules add warranties for "electronic checks" and "electronic returned checks," terms that are defined to mean an electronic image of, and electronic information derived from, a paper check or paper returned check that is sent to a receiving bank under an agreement between the sender and the receiving bank and that conforms with ANS specifications for Electronic Exchange of Check Image Data. Any bank that presents an electronic check or electronic returned check and receives a settlement or other consideration for it will warrant that the electronic image accurately represents all of the information on the front and back of the original check and includes an accurate record of all MICR line information. The bank will also warrant that no person will receive a transfer, presentment, or return of, or otherwise be charged for an electronic check or electronic returned check, the original check, a substitute check, or a paper or electronic representation of a substitute check such that the person will be asked to make payment based on a check it has already paid. All of these warranties would be made to the transferee bank, any subsequent collecting bank, the paying bank and the writer of the check (the drawer), in the case of transfers for collection or presentment. In the case of transfers for return, the warranties will run to the transferee returning bank, any subsequent returning bank, the depositary bank, and the owner.

Regulation CC also is amended to add indemnities for "electronically-created items," which are electronic images that have all the attributes of an electronic check or electronic returned check but that are created electronically and are not derived from an actual paper check. Each bank that transfers or presents an electronically-created item and receives settlement or other consideration for it will indemnify each transferee bank, any subsequent collecting bank, the paying bank, and any subsequent returning bank against losses resulting from the fact that (1) the electronic image or electronic information is not derived from a paper check; (2) the person on whose account the item is drawn did not authorize the issuance of the item in the stated amount or to the identified payee; and (3) the person receives a transfer, presentment, or return of, or otherwise is charged for an electronically-created item such that the person is asked to make payment based on an item or check it has already paid. The indemnity amounts are limited in the same way as under the remote deposit indemnity rules.

Lastly, the amendments modify the expeditious return requirements for checks, including by making electronic returned checks subject to those rules. The new rules generally will require returns in an expeditious manner such that the check would normally be received by the depositary bank no later than 2 p.m. (local time of the depositary bank) on the second business day following the banking day on which the check was presented to the paying bank. The final rule also requires a paying bank that determines not to pay a check of $5,000 or more to provide notice of nonpayment such that the notice would normally be received by the depositary bank by 2 p.m. on the second business day following the banking day on which the check was presented to the paying bank. This is a change from the current rule that requires the notice for checks of more than $2,500 with a 4 p.m. deadline. To increase incentives for all banks to receive electronic returns, a paying bank and returning bank would be liable to a depositary bank for failing to return a check in an expeditious manner only if the depositary bank has arrangements in place to allow the electronic return of checks by commercially reasonable means. When the paying bank or returning bank is liable to the depositary bank, it would be liable for the amount of the loss incurred, up to the amount of the check, but reduced by the amount of the loss that the depositary bank would have incurred even if the paying or returning bank had exercised ordinary care (this is not a change from current Regulation CC).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions