NCP 2015 Exam Cycle Core Training Series Session 6 National Check Payments Certification Image Exchange: Rules and Agreements – Part II Copyright© 2014 by the Electronic Check Clearing House Organization NOTICES This training course may provide an introduction to or summary of various aspects of check payments and the legal and rules framework for check image exchange. Responsibility for compliance with image exchange rules, and/or the 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 and related “live” webinar or webinar playback. 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. These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO. Copyright© 2014 by the Electronic Check Clearing House Organization (Certain contributed content subject to third party copyrights) National Check Payments Certification 2 NCP Exam Registration Reminder • Free study aids upon registration: – P.R.E.P. Guide: 300+ pages of information, training guide, sample exam – Question of the Day: Summary available now New daily question & detailed study answer delivered via email beginning January 2015 – NCP Roadmap – Direction on establishing study plan – JumpStart Reading Program – Links to all references • Exam Fees: $400 ECCHO member $500 non-ECCHO member – Not sure about membership? Check current status at: http://www.eccho.org/memberships o Enter name in search box on left National Check Payments Certification 3 Session Overview • Rules and Agreements • Federal Reserve Operating Circular 3 (OC3) and Reg J • ECCHO/Fed Rules Comparison National Check Payments Certification 4 Rules and Agreements Need for Rules • Regulations vs. Rules – UCC and Reg CC provide statutory and regulatory definitions for paper checks No default definition of image in current check law – Where is the image of a check defined? • Image Exchange by Agreement – No laws cover exchange of check images – Need agreements for exchanges through: Federal Reserve or Private sector • Session will review provisions of Fed’s Operating Circular 3 (OC 3) and warranties provided through Reg J National Check Payments Certification 6 Operating Circular 3 (OC 3) • Applies to handling of all cash items Fed: – Accepts for forward collection; and – Accepts for return • Circular includes instructions to banks for handling and paying items received from Fed: – Paying banks – Collecting banks – Returning banks – Depositary banks • Also covers related services provided by Fed National Check Payments Certification 7 Regulation J • Reg J provides legal framework for FIs to clear checks via the Federal Reserve System – Regulation specifies terms/conditions under which FRBs: Receive items for collection from banks; and Present items to banks – Establishes rules under which FIs may return checks through the Fed • Includes forward and return warranties – For electronic items sent through Fed Referenced by Fed’s Operating Circular 3 (OC3) • Works in conjunction with Reg CC – Discussed in prior session National Check Payments Certification 8 Related Services – Agreements • Participant banks must execute agreement for various image-enabled services: – FedForward® Services Deposit image cash letters of forward collection items o FRBs will clear and present as either substitute checks or an electronic file to paying bank – FedReturn® Services Deposit mixed image cash letters of return items – FedReceipt Plus and FedReceipt Plus for Returns Services “Straight-through" electronic check processing for portion or all of inclearings or outbound returns – Check Adjustments Services Resolution of debit/credit settlement discrepancies on checks processed or handled by Federal Reserve National Check Payments Certification 9 Federal Reserve – OC 3 and Reg J General Provisions • Monitoring Account – Forward and Return – Depositary, Collecting or Paying Bank responsible to monitor Fed account to ensure receipt of forward presentment items and returns • Cutoff Hour Return Deadline – For purposes of return forward items received after 2:00 p.m. local time considered received next banking day National Check Payments Certification 11 Definitions • Cash item – Check other than one classified as a noncash item – Any other item payable on demand and collectible at Reserve Bank that receives the item and is willing to accept as a cash item • Check – Draft, as defined in the Uniform Commercial Code, that is drawn on a bank and payable on demand • Item – An instrument or a promise or order to pay money, whether negotiable or not, that is payable in a Federal Reserve District and collectible in funds acceptable to the Fed National Check Payments Certification 12 Definitions • Electronic item – Must include an electronic image of check and information describing that check Must conform to Federal Reserve technical requirements for processing electronic items – Must be captured from a check • May choose not to handle item if: – Judges it should not be handled as cash item National Check Payments Certification 13 Warranties and Indemnity • Operating circular references Reg J for check exchange warranties • Sender warrants and indemnifies Reserve Bank – Against loss, claim, or damage that results in the handling of these items FRBs are liable for own negligence and actions that are not “in good faith” – See Reg J warranty and indemnity summary in PREP Guide National Check Payments Certification 14 Electronic Access • Use of electronic connection – Bank agrees to terms established in OC5 – Not every electronic access supports every feature May need more than one electronic access – Bank is a “Participating Bank” • Participating Bank must: – Establish bank's systems functionally compatible with Reserve Bank Ensure capability to process volumes – Meeting conditions requires Identify Reserve Bank office where items will be sent Specify maximum volume • Bank must execute agreement with Fed and meet conditions of Fed – Bank has continuing obligation that systems are compatible – Need prior consent to exceed daily maximum National Check Payments Certification 15 Electronic Services • Disruptions in Electronic Services – Problems may disrupt electronic access to services – If unable to provide service Fed/Bank to notify Bank/Fed May elect to use physical form – Bank must be prepared to meet its legal obligations when electronic access not available – Information is deemed to be sent/received at physical location identified by the RT Time is deemed local time of location – Fed and Bank may exchange items in paper form • May select agent to act on their behalf to: – Access Fed system to process checks, send/receive cash letters and return cash letters – Bank warrants that information is substantially accurate – Bank is responsible for security and controls Settle based on exchanges of agent National Check Payments Certification 16 Transmission • Delivery and Receipt for All Forward/Return – Delivered by Fed/Bank and received by Bank/Fed when placed on Fed storage device that makes file available to retrieve or review Fed may also transmit to Bank • Bank must manage its electronic connection – If fails to manage, Fed may limit attempts to send In such a case, Fed is deemed to have sent information when it attempts to transmit the information • For purposes of knowing when an item, notice, message, acknowledgement, or information file delivered / received, Fed records are determinative • By use of electronic connection Bank agrees that connection is reasonable means of communication National Check Payments Certification 17 Retention • FRB retains cash letter no longer than two days – Bank bears responsibility to retrieve its files in timely manner • Fed not obligated to retain or make copies of electronic items National Check Payments Certification 18 Cash Letter Processes • Cash Letter Prep – Items may be listed by amount without further description – Cash letters dated and identified by sender’s name /routing number – Accept following items forward/return only in special cash letters Noncash items Carrier documents Food coupons Foreign items Photo-in-Lieu (PIL) – May require forward/return cash letter be segregated National Check Payments Certification 19 Cash Letter Processes • Image and Return Cash Letters – Sender provides file conforming to standards Conform to DSTU X9.37 and FRB user document – Files must be transmitted by means of electronic connection – Entire file must be received prior to processing deadline Must successfully pass Reserve Bank edits – Not responsible for delays in handling or lost files Liable for loss within own shop that causes delay Liable for delays created by own negligence – Reserve Bank will send acknowledgment to sender Receipt acknowledgement (positive) or Non-receipt(negative) National Check Payments Certification 20 Indorsements • All cash items and return checks sent must be indorsed according to Reg CC – Items received without senders indorsement, FRB may choose to: Present the item as if it was indorsed Add the indorsement Return item National Check Payments Certification 21 Availability of Credit • Federal Reserve accepts items, forward and return, in accordance with published schedules and procedures – Provides credit in accordance with published circulars • Items defined and handled as “Cash Items” (Check, substitute check, electronic items as defined in circular, government check, postal money orders, savings bonds, foreign items) – Appendix A: Government Checks – Appendix B: Postal Money Orders – Appendix C: Redeemed Savings Bonds / Savings Notes – Appendix D: Foreign Cash Items National Check Payments Certification 22 Presentment • Federal Reserve Bank may physically present items at any location as defined in Reg CC – Paying bank is considered to receive a cash item when delivered as requested or when made available for pickup as arranged • Reserve Bank may present an electronic item to Paying bank by transmitting or delivering an image cash letter containing the electronic item • Presentment occurs when the image cash letter is: – Transmitted to the paying bank, or – Written on the Reserve Bank’s data storage device Must be in a form that is available for retrieval by the paying bank National Check Payments Certification 23 Notification • For Forward Presentment and Return: – Federal Reserve Bank has no responsibility for giving notice to a sender of anticipated delays in presentment or return of cash items unless: Delay is expected to involve at least ten paying banks and Lasts at least three business days National Check Payments Certification 24 Returned Checks • Paying bank may return through Fed if it meets deadlines – May send to Fed items not handled in forward –No commingling with forward cash letters • Bank sending returned check warrants return is within legal timeframes and indemnifies Fed from any loss • Fed does not agree to handle item more expeditiously than required by Reg CC National Check Payments Certification 25 Returned Checks • If Bank unable to identify depositary bank on check received from Fed • Bank may send back to Fed • Fed may rely on amount and depositary bank in appropriate field • May return item to depositary bank or prior collecting bank by returning electronic image and data – Return occurs when image return is written on data storage device National Check Payments Certification 26 Returned Checks • Fed may resend file two days after original file sent • • • • – Based upon request – Bank indemnifies Fed for any loss Return conforms to Fed’s technical or operational requirements Bank must settle for returns as it does cash items If return misrouted, encouraged to send promptly to identified depositary bank – If unidentified, bank sends NOI (Not Our Item) to Fed Fed does not handle as a cash item an item that has been declined for payment two or more times – Only allows two total presentments One re-presentment only National Check Payments Certification 27 Other Provisions • Notice of Non-Payment Service – Paying Bank may request this service Fedline for the Web Fedline Advantage – Competing service to EARNS notification system • OC3 also includes: – Adjustments – Appendices for specialized products and services offered by Federal Reserve Banks National Check Payments Certification 28 ECCHO / FED Rules Comparison ECCHO and Fed Rules Federal Reserve – Creates its own image exchange rules (OC3) – Fed does not incorporate the ECCHO rules into its Operating Circulars – Reserve Bank is itself a party to exchange of check images ECCHO – Creates and maintains rules for private sector image exchange – Rules apply only to exchanges among its members or licensing organization – Members (not ECCHO), are parties to the check image exchanges 30 ECCHO and Fed Rules Federal Reserve ECCHO – FRBs support specific set of check image exchange products – ECCHO rules are neutral on vendors and products Check 21 products for both receive and send processing • FedForward® • FedReceipt® • FedReturn® • Other Image Services National rules set accommodates all types of check image exchange models such as direct exchanges, Image Archive, etc. National Check Payments Certification 31 ECCHO and Fed Rules Federal Reserve ECCHO Presentment is based on what is “sent” Presentment is based on what is “received – Presentment occurs when – Presentment occurs when the electronic data and the image are received or made available to the Paying Bank the electronic data is sent or made available to the Paying Bank Items considered “presented” when placed on FRB storage device for Paying Bank to pick up or when transmitted to the Paying Bank National Check Payments Certification Presentment under ECCHO rules occurs when the file is received or made available 32 ECCHO and Fed Rules Federal Reserve ECCHO Indemnities from Sending Bank Indemnities from Sending Bank – When FRB sends items to Paying Bank, no indemnity is provided other than Check 21related indemnity – ECCHO rules provide full indemnity for breach of image rules warranties Remotely Created Checks (RCC) Claims – Handled only through adjustment process – Only for items sent forward through the Fed Remotely Created Checks (RCC) Claims – Handled as either return or through adjustment process – Can be item sent through Fed or ECCHO forward exchange National Check Payments Certification 33 ECCHO and Fed Rules Federal Reserve – Fed requires Full MICR line for item to be eligible to exchange • Required to create substitute check – Adjustments • Item to be adjusted must have been exchanged through FRB National Check Payments Certification ECCHO – Default is FULL MICR • Allow Partial MICR by agreement • Rules further define As-Read MICR or RNA – Adjustments • Rules allow items to be adjusted between members that may/may not have been exchanged under ECCHO rules 34 Questions National Check Payments Certification 35 Recommended Resources • Federal Reserve website: – www.frbservices.org/regulations/operating_circulars.html • Regulation CC (12 CFR – Part 229):www.ecfr.gov • Regulation J (12 CFR – Part 210): www.ecfr.gov • ECCHO website: www.eccho.org/rules National Check Payments Certification 36 Ellen Heffner, NCP Director and Education Manager [email protected] 214-273-3211 Image Exchange: Rules and Agreements – Part II Thank You! Electronic Check Clearing House Organization 3710 Rawlins Street; Suite 1075 Dallas, Texas 75219 NOTICE This NCPC Program document contains copyrighted materials of its publisher. These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO.