CUNA Regulatory Comment Call
May 24, 2005
CHECK 21 SURVEY
The Federal Reserve Board is implementing Section 15 of the Check Clearing for the 21st Century Act (Check 21), which requires the Federal Reserve to study the implementation of the law and its effect on various aspects of check processing. The results of the survey and any recommendations must be reported by the Federal Reserve to Congress by April 28, 2007.
The study is voluntary for financial institutions, but will be used to gather information on funds availability, check fraud, check collection and return methods and timeframes. The Federal Reserve must study and report to Congress on:
- The percentage of total checks cleared in which the paper check is not returned to the paying bank;
- The extent to which banks make funds available to consumers for local and nonlocal checks prior to the expiration of the maximum hold periods;
- The length of time within which depositary banks learn of the nonpayment of local and nonlocal checks;
- The increase or decrease in check-related losses over the study period; and
- The appropriateness of the time periods and amount limits applicable under the Expedited Funds Availability Act (EFAA).
The Federal Reserve is seeking comments on whether this broad-based survey will accurately characterize the evolving check processing system. Comments on this draft survey are due to the Federal Reserve by July 11, 2005. Please submit your comments to CUNA by June 28, 2005.
Please feel free to fax your responses to CUNA at 202-638-7052; or e-mail them to Associate General Counsel Mary Dunn at firstname.lastname@example.org or to Assistant General Counsel Lilly Thomas at email@example.com; or mail them to Mary or Lilly c/o CUNAs Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. Click here for a copy of the Federal Reserves draft survey.
Check 21 was enacted to begin increasing the efficiency and security of the payments system by facilitating the use of electronic check processing. Check 21 does not require financial institutions to generate digital check images, but does require acceptance of a new negotiable instrument, called a substitute check, which is created from the electronic information captured from the original paper check. This will facilitate moving away from a paper-based system and toward electronic check processing. Because of the move toward electronic processing, there is concern that the time it takes to deduct money from a consumers account to pay a check will be greatly reduced, while the length of time for a consumer to access funds deposited via a check will remain the same.
As required by Section 16 of Check 21, the Federal Reserve proposes to conduct a broad-based survey so that it can accurately characterize the evolving check processing system. When a check is deposited, its availability for withdrawal is governed by Regulation CC, which implements the Expedited Funds Availability Act (EFAA). EFAA and Regulation CC set maximum hold periods for checks deposited into transaction accounts at depository institutions. EFAA also requires the Federal Reserve to reduce the statutory funds availability schedules as the check clearing system improves, while also ensuring that the reduced schedules give depositary financial institutions enough time to learn of the nonpayment of most checks in various categories, such as nonlocal checks and local checks.
The Federal Reserve plans to randomly select financial institutions based on their transaction accounts and categorize like-sized institutions together. The Federal Reserve estimates that it will select approximately 3000 financial institutions, of which 600-800 will most likely be credit unions.
The proposed survey would consist of five sections. Section I would collect general information on the depositary institution, such as name, address, and contact person.
Section II will have seven questions on the depository institutions losses and recoveries related to check fraud. A financial institution would be asked to provide information from its role as a paying bank and bank of first deposit. Questions include:
- An institution would be asked to provide the value and number of check losses incurred in 2005, as well as the value and number of cases associated with recoveries received in 2005 from check losses.
- Banks of first deposit would be asked to provide information on their losses by category, such as the origin of the check (local or nonlocal), whether the check was dishonored versus subject to a warranty claim, and the age of the account.
- Paying banks would be asked to provide their losses both the dollar value and number of cases by presentment method. Presentment methods would include original checks, substitute checks, or electronic checks.
- Institutions would also be asked to compare check losses in 2005 with those in 2004.
Section III would consist of two questions. The questions would consist of the volume of checks from the paying bank from the bank of first deposit. The paying bank would be asked to provide the total number and value of checks presented to it in a calendar month, which would be categorized by the way in which checks were presented, such as original checks, substitute checks, and electronic checks. The bank of first deposit would be asked to provide the total number and value of checks deposited during the same calendar month, categorized by whether the checks were local or nonlocal.
Section IV consists of five questions on the institutions funds availability policies and practices for next-day availability, local, and nonlocal checks. Questions in this section consist of:
- The number of transaction accounts and the percentage of these accounts held by consumers;
- Its published funds availability policy, including the percentage of consumer transaction accounts for which the policy permits hold extensions on a case-by-case basis; and
- The changes (if any) the institution has made to its policy in the past two years;
- The institutions funds availability practices for deposits that do not qualify as exception holds under Regulation CC;
- The percentage of check deposits subject to Regulation CC exception holds that receive later availability than the Regulation CC permitted holds for next-day availability, local, and nonlocal checks.
Section V consists of three questions addressing the institutions experiences with retuned checks. The institution would be asked to specify the number of business days within which it receives local and nonlocal checks that have been returned unpaid by the paying bank. Two questions request data on notifications and procedures regarding large-dollar returned checks.
QUESTIONS REGARDING THE PROPOSAL
- How can the survey be modified to improve its responsiveness to the requirements
of Check 21
- To what extent are credit unions, in their role of first deposit, able to categorize
check losses by local and nonlocal checks?
- To what extent are credit unions, in their role as paying banks, able to categorize
check losses by presentment method?
- The Federal Reserve would like to learn how often a financial institution makes funds
available sooner than Regulation CC requires? In the proposed survey, the Federal Reserve
asks for an institutions published funds availability policies and practices for check
deposits to consumer transaction accounts (Questions 45.2 and 4.4 in survey draft). Might
the questions be restructured to better capture this information?
- The draft survey provides five specific reasons why an institution might change their
funds availability policies (Question 4.3(d)) including merger, fraud losses, competitive
factors, risk profiles, and faster check collections. Do these options capture the reasons
why institutions might have changed their funds availability policies? Please list any
other reasons that should be listed as an option.
- Do institutions typically track check losses by check or by case (which may involve one
or more checks)?
- Do you believe categorizing financial institutions by their transaction accounts is
a good measure of their size as it relates to the number of checks written in the institutions?
If not, what other method would more accurately categorize financial institutions?
- Do you have any additional comments on issues not raised in this Comment Call?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Lilly Thomas Assistant General Counsel (202) 508-6733 email@example.com
Catherine Orr Senior Regulatory Counsel (202) 508-6743 firstname.lastname@example.org