CUNA Regulatory Comment Call


May 24, 2005

CHECK 21 SURVEY

EXECUTIVE SUMMARY

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 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 mdunn@cuna.com or to Assistant General Counsel Lilly Thomas at lthomas@cuna.com; or mail them to Mary or Lilly c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. Click here for a copy of the Federal Reserve’s draft survey.

BACKGROUND

Check 21 was enacted to begin increasing the efficiency and security of the payment’s 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 consumer’s 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.

DISCUSSION

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 institution’s 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:

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 institution’s funds availability policies and practices for next-day availability, local, and nonlocal checks. Questions in this section consist of:

Section V consists of three questions addressing the institution’s 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

  1. How can the survey be modified to improve its responsiveness to the requirements of Check 21
















  2. To what extent are credit unions, in their role of first deposit, able to categorize check losses by local and nonlocal checks?
















  3. To what extent are credit unions, in their role as paying banks, able to categorize check losses by presentment method?
















  4. 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 institution’s 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?
















  5. 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.
















  6. Do institutions typically track check losses by check or by case (which may involve one or more checks)?
















  7. 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?
















  8. Do you have any additional comments on issues not raised in this Comment Call?
















Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Lilly Thomas • Assistant General Counsel • (202) 508-6733 • lthomas@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com