Test Master Look

Report
NCP 2015 Exam Cycle
Core Training Series
Session 1
National Check Payments Certification
Check Fundamentals and Check Processing
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
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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
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Session Topics
• Check Basics
– Definitions
– MICR line
• Need for Rules
– Paper vs. Image Exchange
• Check Payments System Overview
• Other Payment Systems
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Check Basics
General Check Definitions
• Section will cover common definitions related to the check
including:
– Bank (general definition)
–
–
–
–
Depositary Bank
Collecting Bank
Paying Bank (also called “Drawee” in the UCC)
Drawer
Payee
Amount
Courtesy Amount
Legal Amount
MICR line
Selected MICR line fields
• Other definitions discussed in subsequent sessions related to
specific topics
• For additional definitions, see 2015 NCPC P.R.E.P. Guide section
titled “Glossary of Terms and Common Acronyms”
– Available upon registration to all 2015 NCP exam registrants
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Bank
• Bank: Reg CC definition – Expedited Funds
Availability (EFA) Act uses the term depository
institution
– Reg CC uses simpler term “bank”
Definition includes ALL depository institutions as
defined by both the:
o FDIA – Federal Depositary Insurance Act
o FCUA – Federal Credit Union Act
– Includes:
Insured commercial bank;
Insured credit union;
Mutual savings bank;
Savings and loan association; or
Agency or a branch of a foreign bank as defined in the
International Banking Act
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Blank Check Example
Basic Consumer Check
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Parts and Parties to the Check
• Paying Bank: Bank by which check is payable, to which it is sent for
payment or collection
– Federal Reserve Bank (FRB) / Federal Home Loan Bank (FHLB) by which
check is payable; or
– Bank through which a check is payable, if check is not payable by a bank; or
– State or unit of local government on which a check is drawn and to which
it’s sent for payment or collection
• Drawer: Person ordering payment; Person signing the check
• Drawee: Bank / person ordered to pay the check
• Depositary Bank: First bank to which check is transferred even
though it may also be Paying Bank of payee (Reg CC definition)
– Depositary Bank or Bank of First Deposit (BOFD) and Paying Bank may be
the same bank for on-us items
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Parts and Parties to the Check
• Correspondent Bank: May conduct business transactions,
accept deposits and gather documents on behalf of other
financial institutions (respondents)
• Collecting Bank: Any bank handling a check for forward
collection, except the Paying Bank
• Amount – UCC 3-104 requires a fixed amount for the item
to be a negotiable instrument
– Amount should appear twice on the check to help inhibit
check fraud
– Both in numbers and words
Courtesy amount (or convenience amount) – Amount in numbers
Legal amount – Amount in words
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Processed Check – Front
National Check Payments Certification
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Processed Check – Back
Depositary Bank
E RE H ES R O D N E
DO NOT WR ITE, S TA MP OR SIGN B ELOW THIS LINE
Indorsers
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What is MICR?
• Magnetic Ink Character Recognition (MICR)
– 1956
– Descriptive information comprised of numbers
and symbols
– Magnetic ink printed characters that can be
recognized at high speed by automated processing
equipment
– E-13B Font – Used in magnetic ink printing in USA,
Canada and several other countries
Consists of ten numeric characters and four symbols
– MICR line at the bottom of physical check
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MICR Line of a Check
• Six-inch check
– Generally used for consumer checking accounts
DRAWER NAME
STREET ADDRESS
CITY, STATE
12-5-09
Payee’s Name
One hundred twenty-three and
45/100
123.45
Drawer’s Signature
Account Number
and
Serial Number
10 DIGITS
– External Processing
ABA Routing Number
Code Field
- 9 digits, no spaces
Optional
- bounded by transit symbols
1 digit
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MICR Line
• Key Fields – Six-inch check
– Amount
10 digit field
– On-Us
Drawer’s account number
 Check serial number
– Routing Number
ABA assigned routing number for Paying Bank
– EPC – External processing code
Optional, single-digit field
o Provides information for handling or routing of check/check
data to financial institutions and other processors
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MICR Line of a Check
• Large check (longer than six inches)
– Generally used for business checking accounts
Payee’s Name
One hundred twenty-three and
12-5-09
45/100
123.45
Drawer’s Signature
Aux On Us Field: Can optionally include serial number or
other transaction or product code
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MICR Line
• Key Fields – Business-sized check
– Same fields as smaller six-inch check
– Includes Aux On-Us (optional field)
To the left of the Routing Field on the MICR line
– Used on commercial checks for
Consecutive serial numbers; or
Account control information; or
Product codes/information
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Routing Number
• Used for all financial institutions in the U.S.
• Each FI has a unique number
– Some have more than one
• Two forms are currently used:
– MICR form
– Fractional form
• Both forms appear on most checks,
although only MICR form is used in
automated item processing
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Routing Number – MICR Form
• Called the ABA Routing Number
– May be referred to as:
ABA Number
Routing Transit (RT)
Routing Transit Number (RTN)
ABA Institution
Identifier (4 digits)
Check digit
(1 digit)
–
–
–
–
Federal Reserve Routing Symbol
(4 digits)
First two digits designate Fed District location of Paying Bank and Type of Institution
3rd and 4th digits represent specific Fed bank or branch serving paying institution
5th through 8th digits are ABA number for paying institution
9th digit is RT number validation (Check digit)
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Routing Number – Fractional Form
91-03
1221
Numerator includes a city (1-49) or
state (50-99) prefix followed by the ABA
institution identifier
91-03/1221
National Check Payments Certification
Denominator is the Federal Reserve
Routing Symbol
• ABA and Federal Reserve numbers match
corresponding numbers in MICR form without
leading zeros
• Additional letters or numbers may be printed if
paying bank wants
• May be printed in one of two forms as shown
•
20
Example: Fractional RT
• ABA routing number:
122100037
91-03/1221
• In MICR form, shown
on check’s
MICR line:
National Check Payments Certification
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Example – Fractional RT
• To convert to fractional form
• ABA routing number: 122100037
– Drop check digit - last number
in ABA routing number
– Pick-up city or state prefix
 Assigned by ABA
– ABA institution identifier
 Drop leading zeroes
 Separate with dash “ – “
– Federal Reserve routing symbol
 Separate with slash “/ ”
122100037
12210003
91
9191-03
91-03/1221
0003
1221
91-03/1221
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Need For Rules
Clearing Paper Checks
UCC & Reg CC Provisions
[Statutory and Regulatory]
UCC, Reg CC &
Payee’s Deposit
Agreement
Payee
(Merchant)
UCC & Reg CC &
Correspondent Agreement
BOFD
National Check Payments Certification
Paper
Check
Paper
Check
Paper
Check
UCC, Reg CC &
Check Writing
Agreement
Paying Bank
Drawer
24
Paper Check Law
• Applicable Laws and Regulations
– Impose warranties on financial institutions when
transferring and presenting checks
– Together with case law form boundaries for
most aspects of check processing
• Complemented by large body of court
interpretations
– Provide guidance and understanding in check
payment disputes
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Recognized Role of Rules
• UCC [4-103(b)]
– Recognizes role of check clearinghouse rules
and Federal Reserve Operating Circulars
May set forth additional provisions for paper
check collection by financial institutions
• Reg CC [229.37]
– Recognizes role of check clearinghouse rules
and Federal Reserve Operating Circulars
May vary some provisions of laws and regulations
o However may not fail to act in good faith or exercise
ordinary care
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Clearing Images
Not Covered Under UCC or Reg CC
What Rules or
Agreements Apply?
What Rules or
Agreements Apply?
What Rules or
Agreements Apply?
Remote Deposit
IMAGE
IMAGE
IMAGE
Payee
(Merchant)
Key Considerations:
–
–
–
–
–
–
Drawer
BOFD
Paying Bank
Are the images authorized payments?
When does legal presentment occur?
Can the images be dishonored?
Who is responsible for duplicates?
Who is responsible for data security?
What are the rights of the payee and drawer?
National Check Payments Certification
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UCC Updates
• UCC anticipated electronic check truncation/
image exchange
– 1990 revision (§4-110) permits electronic
presentment of items pursuant to an
agreement for electronic presentment
– Agreement may be in the form of:
Check clearing house rules and/or
Federal Reserve regulation or Operating Circular
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What Did Check 21 Do?
• Designed to encourage check truncation by
removing key barrier to truncation
– No longer required to obtain agreements from all
parties to the transaction
Provides for replacement of paper check with substitute
paper check
Allows unilateral decisions to truncate checks
• Does not mandate the receipt of electronic
(image) transactions
– Only applies to the substitute check
• Encourages image exchange
– Use image technology to create substitute check
National Check Payments Certification
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Paper Check vs. Images
• Regulations vs. Rules
– UCC and Reg CC provide statutory and
regulatory definitions for a paper check,
– but. . .
• No default definition of image in current
check law
• Where is the image of a check defined?
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Need for Rules
• There Are No Laws To Cover Exchange of
Check Images
– Exchanging images in the absence of
agreements exposes financial institution to an
indeterminately large amount of risk
Potential for consequential damages
• Check Image Exchange
– Need agreements for exchanges through:
Federal Reserve or
Private sector
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Exchange Channels and Rules
• Warranties/Indemnities Come From Different Sources
– Federal regulations
– State Laws
– Rules and agreements
• To determine what rules apply, is the item:
– Original physical check, a substitute Check (IRD), or an image
• For images, determine the presentment/clearing channel
– Through the Fed – Reg J and OC3 apply
– Through a clearinghouse – clearinghouse rules (i.e. ECCHO)
– Direct bank to bank (Clearinghouse rules or agreements)
• Generally, warranties start at first bank that deals with
substitute check or image
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Check Rules and Regulations
• Federal Reserve Regulations
– Regulation J
Subpart A: Collection of Checks and Other Items by
Federal Reserve Banks
• Image Rules
– FRB Operating Circulars
OC 3: Collection of Cash Items and Returned Checks
OC 5: Electronic Access
– Private sector clearing house rules (such as the
ECCHO rules)
• Rules and regulations will be discussed in detail
in other sessions
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Check Rules and Regulations
• Uniform Commercial Code (UCC)
– Developed with efforts towards uniform laws for
sales and other commercial transactions in all 50
states
– Detailed Code Addressing Most Aspects of
Commercial Law
Set of standardized state laws that govern financial
contracts
Establishes general duty standards for parties to act in
Good Faith and exercise Ordinary Care
– Organized as Articles
Each deals with a different subject area
o Article 3 covers negotiable instruments
o Article 4 cover bank deposits and funds transfers
National Check Payments Certification
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Check Rules and Regulations
• Code of Federal Regulations (CFR)
– Codification of the general and permanent
rules published by the executive departments
and agencies of the Federal Government
– Title 12 - Banks and Banking
Part 229-Availability of Funds and Collection of
Checks (Regulation CC)
– Reg CC implements legislation relative to:
Funds availability (EFAA)
Substitute checks (Check 21 Act)
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Eliminating Barriers to Image
• Prior to Check 21
– Number of barriers made transition from paper
checks to electronic check payments slow
Difficult to accept and implement
– To truncate paper check and replace with
image, all parties with interest in check had to
agree
With thousands of FIs and millions of customers,
task was impossibly large
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Image Exchange
• Today – Items defined as “checks” under Reg CC and
“items” under UCC eligible for image exchange
– Covered by Fed OC3 and private sector rules such as
ECCHO’s rules
• US savings bonds now transmitted via image
exchange
• Noncash items not eligible for exchange
– ECCHO Rules permit “imperfect image” to be exchanged
• Foreign items currently not eligible
– Canadian items for image exchange
ECCHO-hosted subcommittee discussing topic
o Canadian Payments Association (CPA) and Canadian banks
participating
Updates being discussed for ECCHO Rules
o Goal: Facilitate image exchange of Canadian items within U.S. prior to
delivery to Canadian financial institution
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Check Payments System
Check Collection Process
“Day in the Life of a Check”
Forward Collection
On-Us
Items
Individual
Payor
or
Image
Image
Image
Individual
Payee
Clearing Banks
/Correspondent
Image
Image
Corporate
Payor
Merchant
or
Corporate Payee
National Check Payments Certification
Bank of First
Deposit
(BOFD)
Image
Image
Federal
Reserve
Paying Bank
39
Clearing Payments
• Various channels to move payments
through system to final collection
– May use clearing bank, correspondent or Fed
to present to Paying Bank
– Depositary Bank wants to collect funds quickly
and at reasonable cost
• Depositary Bank collects funds it has
provisionally credited to its depositor’s
account
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Clearing Payments
• Clearing – Exchange of payment instruction
data between financial institutions
– Moves checks from banks where they are
deposited to banks where they are drawn
• Clearing process includes:
– Data collected from multiple transactions
– Sent to FIs core processing system
– Affects accounts of the FI’s customers
National Check Payments Certification
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What is Settlement?
• Settlement – Exchange of value between
financial institutions for payments
– As shown in previous example:
“Clearing” involved exchange of payment
instructions (data) between two financial
institutions
– Settlement: Exchange of funds
Separate event based upon agreement between
the two exchanging parties
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Settlement – Federal Reserve
• Settlement typically occurs at the Federal
Reserve Bank
• All banks designate accounts for settlement
at the Federal Reserve Bank
– May have own Fed account
– May use that of a correspondent
Some banks utilize both and designate which types
of settlement occurs at each account
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FRB National Settlement Service
• Owned and operated by Federal Reserve Banks
• Service is offered to depository institutions that:
– Settle for participants in clearing houses
– Financial exchanges
– Other clearing and settlement groups
• Settlement agents electronically submit
settlement files to Federal Reserve Banks
– Files are processed on receipt
– Entries are automatically posted to depository
institutions' Federal Reserve Bank accounts
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Designated Settlement Accounts
Checks,
Credit Cards,
ACH
+/- $
Bank A’s
Fed Account
National Check Payments Certification
Federal
Reserve
Wires,
TT&L,
Treasuries
+/- $
Bank Bs
Correspondent Account at
Bank A
45
Settlement – Clearing House
Data
Data
Data
Data
Clearing House
• Each member financial institution presents payment
instructions to clearing house
―Clearing house facilitates presentment to each paying
bank for “clearing”
―Settlement occurs as a separate event
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Gross vs. Net Settlement
• Gross Settlement
– Exchange of value for a single payment
• Net Settlement
– Exchange of value for multiple payments
– “Net effect” of all payments is settled to each
financial institution
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Gross Settlement
• For the value of a single payment; one financial institution
receives credit and other receives debit
• DFI sending wire receives a debit on FRB books; DFI receiving the
wire receives the credit
Debit Bank A’s Account on
Books of the Federal
Reserve
-$
Credit Bank B’s Account on
Books of the Federal
Reserve
+$
Federal Reserve
Bank A’s
Fed Account
National Check Payments Certification
Bank B’s
Fed Account
48
Net Settlement
• Multiple payments are grouped together
– Net effect settled to the designated account on books at
Federal Reserve
All debits / credits are
combined for single bank;
Net effect reflected on
designated settlement
account at the Fed
+/- $
Bank A’s
Account
National Check Payments Certification
Federal Reserve
+/- $
+/- $
+/- $
Bank B’s
Account
Bank C’s
Account
Bank D’s
Account
Net settlement:
Settle between
participating banks
in a clearing
network
49
Float Overview
• Float
– Time between the deposit of a check and final
collection and funds availability to the
customer
Dollar value of cash balances created by the time
lag in processing unpaid checks
o Checks outstanding in the process of collection
Conditional credits in a depositor's checking
account until the checks are collected/paid
National Check Payments Certification
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Float Overview
• Float
– Banks receive checks for deposit and
provisionally credit the account of the check
depositor
– Timing of clearing (collection / settlement of
funds from bank upon which check is drawn)
Check clearing results in checks in the process of
collection appearing briefly in the accounts of both
Depositary Bank and Paying Bank
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Types of Float
• Bank Float (Incurred float)
– Non-earning asset created through delay in the
collection of deposited funds
– Correlates to calendar days elapsing between
posting of customer ledger credit and bank receipt
of usable funds
• Customer Float (Allocated float)
– Sum of dollars credited to a demand deposit
account but not available for immediate
withdrawal/earnings credit
– Correlates to calendar days elapsing between
posting of customer ledger credit and funds made
available to customer
National Check Payments Certification
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Positive and Negative Float
• Negative float occurs when:
– Customer Float billed is greater than Bank Float
incurred
• Positive float occurs when
– Bank Float incurred is greater than Customer
Float billed
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Other Payment Systems
Multiple Channels / Options
• Check Can Be Cleared via Multiple Channels
– As a physical check
– As an image
– Convert image to substitute check (IRD)
– As an ACH debit (if check is eligible for
conversion)
ARC – Accounts Receivable entry
POP – Point of Purchase entry
BOC – Back Office Conversion entry
National Check Payments Certification
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Automated Clearing House (ACH)
• Funds transfer system governed by NACHA Rules
– Provides for inter-financial institution clearing of electronic
entries for participating financial institutions
– Generally considered “batch and forward” next day payment
system where: Day 1: Files originated / Day 2: Files settled
RECEIVER
RDFI
Receiving DFI
National Check Payments Certification
ODFI
Originating DFI
ORIGINATOR
ACH
OPERATORS
56
Ineligible Items – ACH
• Following Do Not Qualify for Conversion to ACH
Transactions
– Checks containing Aux on-us field
– Greater than $25,000
– Third-Party checks/share drafts/money orders
– Demand drafts/3rd party drafts with no signature
– HELOC checks
– Money Market Checks
– FI Obligations
Traveler’s checks, official checks, cashier’s checks
– State/local Gov’t checks
– Checks/money orders in a foreign currency
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Other Payment Systems
• Debit Card – Generally use the shared ATM
networks that offer payment services associated
with a financial institution’s DDA systems
• Credit Card –Issued by a company to allow the
user to purchase goods and services from
merchants who accept the card
• Wire – Electronic payment service for transfer of
funds
– Characteristics include:
Large dollar transactions
Immediate availability
Irrevocable payments
National Check Payments Certification
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Questions
National Check Payments Certification
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Recommended Resources
• Uniform Commercial Code (UCC)
– Article 3 – Negotiable Instruments
– Article 4 – Bank Deposits and Collections
• CheckImage Central Website: www.checkimagecentral.org
– White paper on “Need for rules”:
– http://www.checkimagecentral.org/pdf/RoleOfPrivateSecRulesAndFRSRules.pdf
• ECCHO website: www.eccho.org
• Federal Reserve website: www.frbservices.org
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Recommended Resources
• ECCHO website: www.eccho.org
• Federal Reserve website: www.frbservices.org
• Uniform Commercial Code (UCC):
www.law.cornell.edu/ucc
– Article 3 – Negotiable Instruments
– Article 4 – Bank Deposits and Collections
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61
Ellen Heffner, NCP
Director and Education Manager
eheffner@eccho.org
214-273-3211
Check Fundamentals and Check Processing
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.

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