CUNA Comment Letter

RE: Docket No. R-1034, Proposed Rule Regarding the Amendment of Subpart C of Regulation CC

April 30, 1999

Ms. Jennifer J. Johnson
Secretary
Board of Governors of the
Federal Reserve System
20th Street and C Streets, NW
Washington, DC 20551

Re: Docket No. R-1034, Proposed Rule Regarding the Amendment of Subpart C of Regulation CC

Dear Ms. Johnson:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the proposed rule issued by the Federal Reserve Board (Board) regarding the amendment of Subpart C of Regulation CC, which was published in the Federal Register on February 24, 1999. CUNA represents more than 90% of our nation’s 11,000 state and federal credit unions.

Currently, both Regulation CC and the Uniform Commercial Code (UCC) allow a notice to be sent if the check is "unavailable." Under Regulation CC, a check may be considered "unavailable" only if a financial institution cannot obtain possession of the check or must retain possession for protest. The UCC’s definition of "unavailable" is more lenient and includes situations where the check is retained by a collecting institution in accordance with a check retention plan. However, the UCC contemplates that the paying institution will return the check or notice back through the forward collection chain to the institution that presented the check.

The parties to a check may vary the notice provisions. However, unlike the UCC, Regulation CC will not allow these variations to affect anyone who is not a party to the agreement. This requirement may limit the development of notices in the form of an electronically-produced check image. The proposed rule is intended to address this concern and to clarify the interplay between the UCC and Regulation CC regarding the permissibility of notices as an alternative to the return of the actual check.

The proposed rule presents two options for amending Regulation CC and its Commentary in order to achieve these goals. Under the first option, the Commentary to Regulation CC would be amended by stating that institutions may elect to follow the provisions of the UCC and send a returned check or notice only to the institution that presented the check. These institutions would then be able to follow the UCC provisions, as described above, regarding the definition of "unavailable." Under the second option, the Commentary to Regulation CC would simply indicate that notices in lieu of return of the check would be permissible whenever permissible under the UCC. All institutions would then be able to follow the UCC provisions regarding the definition of "unavailable." Both options are intended to facilitate the use of notices in the form of electronically-produced check images by eliminating the issue regarding the binding of non-assenting third parties.

As a participant in the Federal Reserve’s Image Returns Task Force, CUNA understands and generally supports initiatives to improve the check collection system. However, credit unions do have concerns with the proposed rule that need to be addressed. As indicated in the proposed rule, the first option would not facilitate imaging if returns do not follow the forward collection chain, as required under the UCC. Requiring the images to be returned through the forward collection chain would result in unnecessary delays. Although the second option would, therefore, better facilitate the goal of increasing the use of check images in an efficient manner, the concerns of the credit unions generally transcend the issue of which option is preferable.

One of our concerns pertains to the use of an image to collect on a returned check. We are concerned that the image will not capture the information that would be necessary to assert the collection rights of the payee. The drawer of the check may be reluctant to pay if the actual check cannot be produced because of concerns that the actual check may be re-presented. This and other legal requirements could seriously hinder the legal rights of a payee if he or she did not have possession of the returned check.

As a participant in the Federal Reserve’s Image Returns Task Force and its Legal-Regulatory Work Group, we understand that these issues are being examined very closely. However, we believe that credit unions and their members must first be assured that their legal rights are not compromised as a result of widespread use of images. Providing assurances that their legal rights will not be compromised should help to minimize these expectations and result in the greater acceptance of image technology.

Although preferable to the first option, the second option could present operational problems for credit unions. The handling and collecting on returned items could become more complex and time consuming if images are received from multiple sources. The amount of manual sorting that may be required could outweigh the advantages of the new technology. The problem would be compounded if there were a breakdown in the technology.

Again, CUNA generally supports initiatives to improve the check collection system, and would prefer option two, as described in the proposed rule. However, as described above, credit unions do have concerns that should be addressed before any changes are made.

Thank you for the opportunity to comment on the proposed rule regarding the amendment of Subpart C of Regulation CC. If you or other Board staff have questions about our comments, please give me a call at 202-218-7795.

Sincerely

Jeffrey Bloch
Assistant General Counsel