# Availability of Funds and Collection of Checks > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A04-300 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** January 8, 2004 - **Citation:** 69 FR 1470 ## Text FEDERAL RESERVE SYSTEM 12 CFR Part 229 [Regulation CC; Docket No. R-1176] Availability of Funds and Collection of Checks AGENCY: Board of Governors of the Federal Reserve System. ACTION: Proposed rule. SUMMARY: The Board of Governors is publishing for comment proposed amendments to Regulation CC that would add a new subpart D, with commentary, to implement the recently-enacted Check Clearing for the 21st Century Act. These proposed amendments (1) would set forth the requirements of the Act that apply to banks, (2) provide a model disclosure and model notices relating to substitute checks, and (3) set forth indorsement requirements and truncating bank and reconverting bank identification requirements for substitute checks. The proposed amendments also would clarify some existing provisions of the rule and commentary. DATES: Comments on the proposed rule must be received by March 12, 2004. ADDRESSES: Comments should refer to docket number R-1176 and should be addressed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System. Comments may be mailed to 20th Street and Constitution Avenue, NW., Washington, DC 20551; faxed to the Office of the Secretary at 202/452-3819 or 202/452-3102; or mailed electronically to regs.comments@federalreserve.gov. Because paper mail at the Board of Governors is subject to delay, please consider submitting your comments by fax or e-mail. Members of the public may inspect comments in accordance with the Board's Rules Regarding the Availability of Information (12 CFR part 261) in Room MP-500 of the Martin Building on weekdays between 9 a.m. and 5 p.m. FOR FURTHER INFORMATION CONTACT: Jack K. Walton, II, Assistant Director (202/452-2660), or Joseph P. Baressi, Senior Financial Services Analyst (202/452-3959), Division of Reserve Bank Operations and Payment Systems; or Stephanie Martin, Associate General Counsel (202/452-3198), or Adrianne G. Threatt, Counsel (202/452-3554), Legal Division; for users of Telecommunication Devices for the Deaf (TDD) only, contact 202/263-4869. SUPPLEMENTARY INFORMATION: Background I. The Need for and General Provisions of the Check 21 Act Under current law, a bank that presents a check for payment must present the original paper check unless the paying bank has agreed to accept presentment from the collecting bank in some other form. 1 Sections 3-501(b)(2) and 4-110 of the Uniform Commercial Code (U.C.C.) specifically authorize banks and other persons to agree to alternative means of presentment, such as electronic presentment. However, to truncate checks early in the collection process and engage in broad-based electronic presentment, a collecting bank would need electronic presentment agreements with each bank to which it presents checks. This has proven impracticable because of both the large number of paying banks and the unwillingness of some paying banks to receive electronic presentment. 2 As a result of the difficulty in obtaining the agreements necessary to present checks electronically in all cases, banks have not been able to take full advantage of the efficiencies and potential cost savings of handling checks electronically. 1 See, e.g., section 3-501(b) of the Uniform Commercial Code. 2 Some paying banks and bank customers prefer to receive checks in paper form for operational or other reasons. The Check Clearing for the 21st Century Act (the Check 21 Act or the Act) facilitates the broader use of electronic check processing without mandating that any bank change its current check collection practices. 3 The Check 21 Act accomplishes this by authorizing the use of a new negotiable instrument called a substitute check. A substitute check is a paper reproduction of an original check that contains an image of the front and back of the original check and is suitable for automated processing in the same manner as the original check. A bank that for consideration transfers, presents, or returns a substitute check (or another paper or electronic representation of a substitute check) warrants that (1) the substitute check contains an accurate image of the front and back of the original check and a legend stating that it is the legal equivalent of the original check, and (2) no depositary bank, drawee, drawer, or indorser will be asked to pay a check that it already has paid. A substitute check for which a bank has made these warranties is the legal equivalent of the original check for all purposes and all persons. 3 Pub. L. 108-100, 117 Stat. 1177 (codified at 12 U.S.C. 5001-5018). The Check 21 Act was enacted on October 28, 2003, and takes effect on October 28, 2004. Allowing a substitute check that is subject to the substitute check warranties to be the legal equivalent of an original check should facilitate the use of electronics in the check collection process. For example, a depositary bank in California that receives a check drawn on a bank in New York now must present the original paper check for payment absent an agreement to the contrary, even if the California bank has agreements to collect checks electronically with other banks in the collection chain for that check. Under the Check 21 Act, by contrast, the California bank could transfer check information electronically to a collecting bank in New York with which it had an agreement to do so. The New York collecting bank then could create a substitute check to present to the New York paying bank. The New York paying bank would be required to accept a substitute check that met all the legal equivalence requirements. Thus, instead of processing and transporting the original check across the country, the California bank could collect the substitute check using only local New York transportation. The Check 21 Act does not require any bank to use electronic check processing, receive electronic presentment, or create substitute checks, nor would the Check 21 Act make electronic check images or electronic check information the legal equivalent of original checks. However, after the effective date of the Check 21 Act, any bank or other person that requires an original check must accept a legally equivalent substitute check in satisfaction of that requirement. The characteristics of a substitute check are such that a bank that receives a substitute check would be able to process that substitute check to the same extent that it could process the original check. As a result, for the most part, banks would not be required to change their check processing equipment or practices because of the Check 21 Act, and there would be no need for a bank to sort original checks and substitute checks separately during the check collection process. 4 4 However, as described in more detail in the section-by-section analysis, a bank must place a “5” in position 44 of the MICR line of a qualified returned substitute check, as opposed to a “2” that is required in that position for a qualified returned original check. Certain provisions of the Check 21 Act will affect all banks, even those that do not choose to create substitute checks. For example, a bank that simply received a substitute check created by another bank, or a paper or electronic representation of a substitute check, would make the substitute check warranties when it delivered that item for presentment, collection, or return or provided that item to its customer. Any bank that receives consideration for a substitute check, or a representation of a substitute check, that it transfers, presents, or returns also is responsible for indemnifying any person that suffers a loss due to the receipt of a substitute check instead of the original check. Moreover, a bank that provides a substitute check to a consumer might be required to provide an expedited recredit to the consumer if the consumer incurred a loss due to receipt of the substitute check rather than the original check. Finally, a bank must provide a disclosure that describes substitute checks and substitute check rights to consumers who receive paid checks with their periodic account statements and consumers who receive substitute checks on a case-by-case basis. Although the foregoing provisions of the Check 21 Act would apply to all banks, the law is designed so that losses associated with a substitute check ultimately would be borne by the party that caused the problem with the substitute check. In many cases this would be the first bank to transfer the substitute check (the reconverting bank). 5 A bank that paid a warranty claim or provided an indemnity or expedited recredit for a substitute check that it received from another bank therefore could, in turn, bring a warranty, indemnity, or interbank expedited recredit claim against the bank that transferred the substitute check to it and thereby pass the associated loss back to the responsible party. 6 5 A reconverting bank is (1) the bank that creates a substitute check or (2) the first bank that receives a substitute check created by a person that is not a bank and transfers either that substitute check or a paper or electronic representation of that substitute check. 6 Banks may further allocate liability amongst themselves as part of their agreements to handle checks electronically. A reconverting bank therefore could, by agreement, pass back some or all of its loss associated with paying a warranty or indemnity to the bank that sent the check to it electronically. The Check 21 Act imposes additional duties on reconverting banks. A reconverting bank must identify itself as such on a substitute check and must preserve the indorsements of parties that previously handled the check in any form. The reconverting bank will be the first bank to provide the substitute check warranties and the first bank in the chain of indemnifying banks, and thus ultimately should bear any loss traceable to a problem that existed as of the time the substitute check was created. 7 7 But see footnote 6. II. Overview of New Subpart D and Associated Amendments to Subpart A The proposed new subpart D would incorporate into Regulation CC the requirements of the Check 21 Act that affect banks that create or receive substitute checks or paper or electronic representations of substitute checks. Subpart D therefore would contain provisions concerning requirements a substitute check must meet to be the legal equivalent of an original check, reconverting bank duties, the warranties and indemnity associated with substitute checks, expedited recredit procedures for consumers and banks, liability for violations of subpart D, the interaction between subpart D and existing federal and state laws, and the consumer awareness disclosure and other notices regarding substitute checks. The proposed amendments to implement the Check 21 Act also affect some existing provisions of Regulation CC and its commentary. For example, the Board proposes to amend the authority and scope section, § 229.1, to acknowledge the Check 21 Act as an authority source and to describe subpart D. The Board also proposes to supplement some existing defined terms in § 229.2 for which the Check 21 Act has slightly different definitions and to define several new terms used in subpart D. The Board also proposes to amend the magnetic ink character recognition (MICR) line requirements for qualified returned checks to allow for differences to facilitate the processing of substitute checks and to amend § 229.35 and appendix D to include indorsement and identification standards for substitute checks. III. Other Amendments to Existing Provisions The Board also proposes revisions to several other provisions of Regulation CC and its commentary. These changes generally either respond to enquiries that Board staff has received or respond to changed circumstances affecting the relevant provision. For example, the Board proposes amending the commentary to clarify that a returned check notice need not be written, clarify the application of the Electronic Signatures in Global and National Commerce Act (the E-Sign Act) to consumer disclosures required by Regulation CC, and clarify the time by which a paying bank may extend the return or notice of nonpayment deadline. Section-by-Section Analysis The section-by-section analysis discusses the proposed commentary to each section in the course of discussing the proposed regulatory text. I. Amendments to Implement the Check 21 Act A. Section 229.1 Authority and Scope The Board proposes to amend § 229.1 to include the Check 21 Act as an additional source of authority and to describe briefly the scope of new subpart D with respect to substitute checks. B. Section 229.2 Definitions The Board proposes two types of amendments to this section. First, the Board proposes to amend some existing defined terms to account for differences between those definitions and the definitions required by the Check 21 Act. 8 Second, the Board proposes to define new terms used in subpart D. 8 Some terms are defined identically in existing Regulation CC and the Check 21 Act, such that no amendments are necessary. 1. Amendments to Existing Definitions The Board proposes to reword the existing introductory sentence and move into that sentence the text of existing § 229.2(qq), which provides that terms not defined in § 229.2 have the meanings set forth in the U.C.C. a. Account. The Check 21 Act defines the term account to mean any deposit account at a bank and therefore is much broader than the existing definition in § 229.2(a), which essentially is limited to accounts that permit frequent transfers and withdrawals. The Board therefore proposes to amend the account definition to state that the existing definition applies except for purposes of subpart D. The Board proposes a new paragraph defining the term account for purposes of subpart D and, in connection therewith, subpart A, to mean any deposit, as defined at § 204.2(a)(1)(i) of Regulation D, at a bank. The Board also proposes to amend the commentary to the account definition to incorporate these changes and to highlight that many deposits that are not accounts for purposes of subparts B and C would be accounts for purposes of subpart D. b. Bank. The Check 21 Act defines bank to include all of the entities currently defined as banks by § 229.2(e), plus the United States Treasury and the United States Postal Service to the extent that those entities act as payors. The Board proposes to amend the existing definition and its commentary to incorporate the broader definition of bank for purposes of subpart D. For internal consistency, the Board proposes substituting the phrase “paying bank” where the Check 21 Act used the term “payor.” c. Check. The Check 21 Act's definition of check is the same as the definition in existing § 229.2(k) that applies to subpart C. The Board proposes to amend the subpart C definition of check and its commentary to apply to both subparts C and D. The proposed commentary to this definition states that a substitute check meeting the requirements of § 229.2(zz) is a check for purposes of all provisions of Regulation CC. d. Forward collection. The term forward collection is defined in § 229.2(q) to mean the process by which a bank sends a check on a cash basis to the paying bank for payment. The Check 21 Act's definition is substantively the same as the existing definition but includes a clause noting that sending a check to a collecting bank for settlement can be a component of forward collection. The Board proposes to amend the forward collection definition and commentary to include that clause. e. Paying bank. The Check 21 Act's definition of paying bank essentially parallels the definition in § 229.2(z) but adds the U.S. Treasury and the U.S. Postal Service with respect to a check that is payable by one of those entities and is sent to that entity for collection. The Board therefore proposes to amend § 229.2(z) and the commentary thereto to incorporate the broader definition of paying bank in subpart D. f. Qualified returned check. Although the definition of a qualified returned check in § 229.2(bb) remains unchanged by the Check 21 Act, the Board proposes to amend the commentary to that definition as it relates to the content of position 44 of the MICR line. Currently, the commentary notes that a qualified returned check should have a “2” in position 44. The proposed amendment would retain that requirement for original checks but, in accordance with the generally applicable industry standard for substitute checks (American National Standard Specifications for Image Replacement Documents, X9.90 (ANS X9.90)), would require a “5” in position 44 if the qualified returned check is a substitute check. 9 The “5” would ensure that the size of the image of the original check would remain constant on subsequent substitute checks. 9 ANS X9.90 was in draft form on the date that the Board approved this proposed rule. The Board expects that ANS X9.90 will be final on or before October 28, 2004. g. State. The Check 21 Act defines state to include all the entities that are currently listed in § 229.2(ff), plus Guam, American Samoa, the Trust Territory of the Pacific Islands, the Northern Mariana Islands, and any other territory of the United States. The Board therefore proposes to supplement the existing definition of state by including these additional entities as states for purposes of subpart D. 2. Proposed New Definitions a. Claimant Bank. The term claimant bank is used in section 8 of the Check 21 Act regarding expedited recredit claims by banks, although the statute does not define that term. The Board proposes to define the term claimant bank in § 229.2(qq) to mean a bank that submits a claim for recredit under § 229.55 of Regulation CC, which corresponds to section 8 of the statute. b. Collecting bank, consumer, customer, and indemnifying bank. The Board proposes to define the terms collecting bank, consumer, customer, and indemnifying bank at § 229.2(rr), (ss), (tt), and (uu), respectively. The proposed definitions incorporate the Check 21 Act definitions with only minor grammatical variations from the statutory language. c. Magnetic ink character recognition (MICR) line. The Board proposes to incorporate the Check 21 Act's definition of magnetic ink character recognition (MICR) line in § 229.2(vv). The proposed commentary would note that American National Standard Specifications for Placement and Location of MICR Printing, X9.13 (ANS X9.13) is the governing standard for MICR lines of original checks and substitute checks, and that ANS X9.90 has some additional requirements regarding the content of the MICR line of a substitute check. d. Original check. The Board proposes to define the term original check in § 229.2(ww) as the first paper check that is issued with respect to a particular payment transaction. The proposed commentary to this new definition explains that the Board has defined this term in order to distinguish the original check from a substitute check and from other paper or electronic representations of a check. e. Person. The Board proposes to incorporate the Check 21 Act's definition of person in § 229.2(xx). f. Reconverting bank. The Board proposes to define reconverting bank in § 229.2(yy) to be (1) the bank that creates a substitute check or (2) with respect to a substitute check created by a person that is not a bank, the first bank that receives the substitute check and that transfers, presents, or returns the substitute check or, in lieu of that substitute check, the first paper or electronic representation of that substitute check. The proposed commentary to this definition provides further clarification as to when and where creation of a substitute check occurs and explains that a bank need not accept a substitute check that was created by a nonbank and that has not yet been handled by a bank, unless the bank agrees to do so. Moreover, the proposed commentary provides examples of when a bank would be a reconverting bank under the definition and notes that there could be multiple reconverting banks with respect to the same payment transaction if a check moves from electronic form to substitute check form multiple times throughout the collection and return process. g. Substitute check. The Board proposes to incorporate the Check 21 Act's definition of substitute check in § 229.2(zz). The scope of the Check 21 Act and subpart D is limited to substitute checks. To clarify the scope of the term and the subpart, the Board proposes extensive commentary on the definition of substitute check. The proposed commentary provides guidance on the meaning of a “paper reproduction of an original check” and clarifies that, because a substitute check by definition must be a piece of paper, an electronic check file or electronic check image that has not been printed in accordance with the substitute check definition and generally applicable industry standards is not a substitute check. The commentary also explains what information is required or permitted as part of the original check images that are contained on a substitute check. The Board particularly requests comment on the proposed commentary to the substitute check definition that describes the various ways in which the MICR line of a substitute check can vary from the MICR line of the original check. First, the commentary notes that ANS X9.90 requires the content of position 44 of the MICR line of a substitute check to vary from that of position 44 of the original check to ensure that the check image remains constant if more than one substitute check is created to represent the same original check. Second, the commentary acknowledges that the original check could have an encoding error in the amount field (including a failure to encode) and that a substitute check that reproduces that error would meet the definition of a substitute check. However, the commentary notes that a reconverting bank that creates a substitute check from an original check with a misencoded amount field or a bank that handles a substitute check that perpetuates the amount encoding error may repair the MICR line to facilitate the processing of the check without changing the item's status as a substitute check. This approach would be consistent with the current industry practice of allowing a bank to repair the MICR line of an original check when the bank detects an encoding error in the amount field. Third, the commentary notes that the MICR line of the original check could be accurate in every respect but that check imaging equipment could (1) fail to read a portion of the MICR line but note the presence of MICR information with an asterisk, (2) misread a digit in the MICR line, for example by reading an “8” as a “3,” or (3) intentionally read a space or a placeholder, such as a hyphen, to be a “0.” These errors collectively are referred to as MICR-read errors. To ensure that the items a bank transfers in reliance on the Check 21 Act and subpart D meet the definition of a substitute check, the commentary states that before a reconverting bank creates a substitute check it should correct all MICR-read errors. 10 The proposed commentary would clarify that an item that perpetuated a MICR-read error would not be a substitute check as defined in § 229.2(zz). However, as discussed in connection with § 229.51(c) of the proposed rule and the proposed commentary to that section, the Board proposes that, when such a noncompliant item purports to be a substitute check, the substitute check warranties, indemnity, and recredit rights would apply to that item as if it were a substitute check, even though it would not be the legal equivalent of the original check. The Board proposes this approach in order to facilitate compliance with and prevent circumvention and evasion of the Check 21 Act. 10 American National Standards Specifications for Electronic Exchange of Check and Image Data, X9.37, (ANS X9.37), is being amended to address the identification and repair of MICR-read errors that are indicated with asterisks. The Board expects this amendment to be finalized prior to the effective date of the Check 21 Act. h. Sufficient copy and copy. The Board proposes that § 229.2(aaa) would define a sufficient copy to be a copy of an original check that accurately represents the information on the front and back of the original check as of the time of truncation or otherwise is sufficient to determine the validity of a claim. This concept first appears in section 6(d)(1) of the Check 21 Act regarding what a bank must produce to limit its liability for an indemnity claim. The concept also appears in the Check 21 Act (with minor variations) in sections 7(c)(1)(B) and 8(c)(1)(A) regarding what a bank must produce to avoid making a recredit and in section 7(f)(1)(A) regarding the content of the bank's notice regarding denial of a consumer recredit claim. To streamline the regulation and make the various sufficient copy criteria parallel throughout the rule, the rule defines sufficient copy as it is defined in the indemnity section and uses that defined term in the portions of the rule that correspond to the statutory provisions listed above. The Board proposes to define a copy to be a paper reproduction of a check. 11 The proposed commentary to these terms reiterates that an electronic check image that appears on a computer screen but has not yet been printed does not constitute a copy or a sufficient copy. The commentary also provides examples of what types of documents would constitute a sufficient copy. 11 As explained in the analysis of § 229.58, when a bank is required to produce an original check or a sufficient copy, the rule allows a bank to provide an electronic image of that item if the recipient has agreed to receive that information electronically. i. Transfer and consideration. The Board proposes to define transfer and consideration at § 229.2(bbb) in a manner that supplements the U.C.C. definitions of those terms in order to make the warranty, indemnity, and legal equivalence provisions function as contemplated in the Check 21 Act. The Check 21 Act warranties, which are a precondition for the legal equivalence of a substitute check, and the indemnity, are given when a substitute check or representation thereof is transferred, presented, or returned for consideration. Under the existing U.C.C. definitions, a bank that pays a substitute check that it later provides to the drawer or a bank that pays a check presented electronically and then creates a substitute check to give to the drawer would not be transferring the check to the drawer under the U.C.C. and arguably would not receive consideration for the substitute check from the drawer. However, the Check 21 Act explicitly provides that a drawer receives the substitute check warranties if it receives a substitute check or a paper or electronic representation of a substitute check. The Check 21 Act also provides that a drawer who suffers a loss due to the receipt of a substitute check instead of the original check receives an indemnity. These provisions indicate that the substitute check received by the drawer in the examples provided above is intended to be the legal equivalent of the original check and subject to the warranties and indemnity. Therefore, for the limited purpose of making the warranty, indemnity, and legal equivalence sections work as intended, the proposed rule would expand the term transfer to include delivery of a substitute check (or a paper or electronic representation of a substitute check) by a bank to a person that is not a bank. The proposed rule also would expand the term consideration to include the bank's charging, having the right to charge, or otherwise receiving value for a substitute check (or a paper or electronic representation of the substitute check) that the bank transfers. However, the proposed rule would explicitly exclude from the definition of consideration the transfer of a substitute check solely in response to a claim related to that substitute check. 12 The proposed commentary to the transfer and consideration definitions provides examples of the situations the expansion is designed to capture. 12 A bank should be able to produce a substitute check that does not contain the legal equivalence legend as a “sufficient copy” in response to an indemnity or recredit claim. However, if this were considered a transfer for consideration, the bank would be making the substitute check warranties and thus could not in good faith provide a substitute check without a legend, because by doing so it automatically would have breached the legal equivalence legend component of the legal equivalence warranty. j. Truncate. The Board proposes to incorporate the Check 21 Act's definition of truncate in § 229.2(ccc). The proposed commentary highlights that removal of a substitute check is not truncation because truncation refers only to original checks. k. Truncating bank. The Board proposes to define in § 229.2(ddd) the term truncating bank, which is not used in the Check 21 Act but is used in § 229.51 and appendix D of the proposed rule. The Board proposes to define truncating bank (in a manner that parallels the definition of reconverting bank) to be the bank that truncates the original check or, if a person other than a bank truncates the check, the first bank that transfers, presents, or returns the check in a form other than the original check. The proposed commentary to this section provides an example of when a bank would be a truncating bank. C. Section 229.30 Paying Bank's Responsibility for Return of Checks, and Section 229.31 Returning Bank's Responsibility for Return of Checks The Board proposes to revise existing sentences in §§ 229.30(a)(2)(iii) and 229.31(a)(2)(iii) relating to the proper MICR-line encoding of a qualified returned check. These amendments would specify that a qualified returned substitute check must contain a “5” in position 44 of the MICR line, whereas a qualified returned original check must contain a “2” in that position. As discussed above with respect to the definition of a qualified returned check and the definition of substitute check, a substitute check must contain a different number to ensure that the image of the original check remains a constant size. The Board proposes to move the specific references to ANS X9.13 from the regulation text to the commentary of these two paragraphs and specify that this standard applies to original checks. The commentary to each paragraph also would specify that ANS X9.90 is the standard that applies to substitute checks. D. Indorsement Standards: Sections 229.35(a) and 229.38(d) and Appendix D In the current processing environment, banks generally print or “spray” indorsements on original checks when the checks are processed through the banks' automated check sorters. A substitute check will contain previous indorsements physically applied to the original check by preserving the image of the back of the original check. In addition, the reconverting bank will print, or “overlay,” on the back of the substitute check any previous indorsements that were applied to the original check electronically and the reconverting bank's own indorsement. Banks handling checks downstream from reconverting banks generally will process a mix of original checks and substitute checks through their sorters and spray indorsements on both. ANS X9.90 presumes that banks that receive paper checks, including substitute checks, will continue to spray indorsements on those checks in the same locations that they do today. ANS X9.90 also presumes that indorsements physically applied to a check before it is reconverted will be preserved through the accurate image of the back of the check that a substitute check must contain. However, the locations that ANS X9.90 specifies for previously applied electronic indorsements that a reconverting bank physically overlays on substitute checks and for the reconverting bank's own indorsement differ from the indorsement locations specified in current appendix D. In particular, the current appendix requires the depositary bank indorsement to be placed on the back of the check between 3 inches from the leading edge and 1.5 inches from the trailing edge, whereas ANS X9.90 requires a depositary bank's previously applied electronic indorsement to be overlaid by the reconverting bank on the back of a substitute check between 1.95 and 2.55 inches from the leading edge. 13 The current appendix requires a subsequent collecting bank indorsement to be placed on the back of the check between the leading edge and 3.0 inches from the leading edge, whereas ANS X9.90 requires a subsequent collecting bank's previously applied electronic indorsement to be overlaid by the reconverting bank on the back of a substitute check very close to the trailing edge. 13 When looking at a check from the front, the leading edge is the right edge of the check and the trailing edge is the left edge of the check. The Board believes that, in light of technical constraints, existing check sorting equipment will not be able to modify in real time the location of the indorsements that the equipment sprays onto a check based on whether the check is an original check or a substitute check. The Board therefore proposes that the appendix's current location specifications would apply to indorsements printed on original checks and indorsements printed on existing substitute checks. Banks that do not create substitute checks generally would comply with the amended appendix D requirements by indorsing original checks and existing substitute checks exactly as they indorse original checks today. However, the Board proposes to amend appendix D to include new indorsement locations with which a reconverting bank must comply when it creates a substitute check. These locations would conform to ANS X9.90's location specifications for indorsements applied to a substitute check by a reconverting bank. The Board also notes that ANS X9.90 provides that an image of an original check will be reduced in size when placed on a substitute check. Images of business-sized checks will be reduced to about 65 percent of their original size and images of personal-sized checks will be reduced to about 80 percent of their original size. Because of this size reduction, the location of an indorsement, particularly a depositary bank indorsement, sprayed on an original paper check likely will change when a reconverting bank creates a substitute check that contains that indorsement within the image of the original paper check. The Check 21 Act places ultimate liability on the reconverting bank for certain losses related to substitute checks. The Board believes that the reconverting bank also should bear the liability under § 229.38(d)(1) (which allocates liability for losses due to illegible indorsements) for any loss that results due to the shift in the placement of the indorsement. The Board proposes to amend that section and its commentary to explain this reconverting bank liability. Appendix D currently requires depositary bank indorsements to be printed in dark purple or black ink and requires all other indorsements to be printed in an ink color other than purple. The Board does not believe that the use of differing ink colors significantly aids returning banks' ability to identify the depositary bank indorsement. However, the Board does believe that it is important for all indorsements to be printed in dark ink so that they can be easily read and imaged. The Board further believes that all indorsements that a reconverting bank prints onto a substitute check at the time that the substitute check is created will be printed in a single ink color, likely black. The Board therefore proposes to require all indorsements, including the depositary bank indorsement, to be printed in black ink. Current appendix D requires a depositary bank to include its name and location in its indorsement. However, ANS X9.37 does not include this data in an electronic depositary bank indorsement record, and as a result this data will not be included when a reconverting bank overlays a depositary bank indorsement onto a substitute check. Nevertheless, a depositary bank that sprays its indorsement onto a check may wish to include this information in its indorsement to limit the number of locations at which it must accept returned checks. The Board therefore proposes to permit but not require the inclusion of the depositary bank's name and location in its indorsement. Appendix D currently does not contain any content requirements for returning bank indorsements and implicitly permits the indorsements to be placed on the front of the check. Under ANS X9.90, however, a returning bank that also is a reconverting bank with respect to a substitute check must be identified as such on the back of the check. The Board therefore proposes to amend appendix D to require returning bank indorsers to comply with the same indorsement requirements as collecting banks. Specifically, the Board proposes to require that a subsequent collecting bank or returning bank indorsement be applied to the back of a check and include only (1) the bank's nine-digit routing number, and, if the returning bank is a reconverting bank with respect to the check, an asterisk at each end of the number to identify the bank as a reconverting bank, (2) the indorsement date, and (3) an optional trace or sequence number. The Board requests comment on what benefits, if any, there would be in providing returning banks with the flexibility to indorse on the front of checks and to include additional information in their indorsements. The Board notes that Regulation CC does not require paying banks to indorse checks. To facilitate compliance with section 4 of the Check 21 Act, however, a paying bank that also is a reconverting bank with respect to a substitute check should be identified as such on the check in a manner that a subsequent reconverting bank can preserve. 14 The Board therefore proposes to amend appendix D to require a paying bank that is also a reconverting bank with respect to a substitute check to identify itself as such by placing on the back of the check its nine-digit routing number (without arrows) and an asterisk at each end of the number. This identification would not constitute an indorsement. 14 If the paying bank were a reconverting bank and did not identify itself as such on the back of the check, then the only place the paying bank would be identified as a reconverting bank would be the routing number of the paying bank, surrounded by asterisks, on the front of the check (according to ANS X9.90). If the substitute check were subsequently converted to electronic form and reconverted to paper, the identification of the paying bank as a reconverting bank on the front of the check would be lost, because its routing number would be replaced with the identification of the subsequent reconverting bank. This would place the subsequent reconverting bank in violation of the Check 21 Act's requirement “to preserve any previous reconverting bank identifications” ( see section 4(d) of the Check 21 Act). Finally, for purposes of clarity, the Board proposes other technical amendments to appendix D. The Board requests comment on all aspects of the proposed indorsement and identification standards discussed above. E. Section 229.51 General Provisions Governing Substitute Checks 1. Legal Equivalence and Agreement Section 4(b) of the Check 21 Act provides that a substitute check is the legal equivalent of the original check for all purposes and all persons if the check contains an accurate image of the front and back of the original check and bears a specified “legal equivalence” legend. Although section 4(b) does not mention warranties as a precondition of legal equivalence, section 4(a) provides that any person may deposit, present, collect, or return a substitute check without the agreement of the recipient so long as a bank has made the substitute check warranties with respect to that check. Section 4(a) clearly intends that persons are required to accept a substitute check without agreement only if a bank has provided the substitute check warranties. The Board therefore believes that section 4(a) in effect requires a bank warranty as another prerequisite of legal equivalence. Section 229.51(a) of the proposed rule would make this requirement explicit by providing that a substitute check for which a bank has provided the substitute check warranties is the legal equivalent of the original check for all purposes and all persons if it meets the accuracy and legend requirements. The proposed commentary to § 229.51(a) reiterates that a substitute check created by a person other than a bank can be transferred only by agreement unless and until a bank makes the substitute check warranties with respect to that check. The proposed commentary clarifies that a substitute check created by a person who is not a bank therefore cannot be the legal equivalent of the original check absent a bank's agreement to make the substitute check warranties. The commentary also provides clarification about what information on the check must be accurately represented as a prerequisite for legal equivalence. Finally, the commentary to § 229.52(b)(2) states that the legal equivalence legend must use the language specified in that section. 2. Reconverting Bank Duties Proposed § 229.51(b)(1)-(2) contains the reconverting bank duties described in sections 4(c) and 4(d) of the Check 21 Act regarding indorsements and identifications. In addition, § 229.51(b)(3) requires a reconverting bank to identify the bank that truncated the original check. The Board proposes to impose this requirement by regulation because ANS X9.90 requires identification of the truncating bank and because it is likely that banks in the collection and return chain would want to identify the truncating bank if there were a problem with a substitute check because the truncating bank would be in the best position to provide the original check or additional information about the original check. The proposed regulation requires the reconverting bank and truncating bank identifications to be applied in accordance with generally applicable industry standards and with appendix D of Regulation CC. The proposed commentary to § 229.51 provides that, although a reconverting bank is responsible for preserving all previously-applied indorsements, it is not responsible for obtaining indorsements that should have been applied but were not. The proposed commentary also notes that some previously applied indorsements will be preserved because they will be shown on a substitute check's image of the back of the original check, whereas the reconverting bank must physically apply to the back of the substitute check any previous indorsements that were applied electronically. The proposed commentary also notes that, under appendix D, the reconverting bank indorsement and identification are set off with asterisks and the truncating bank identification is set off with brackets. The proposed commentary also makes clear that preservation of a previous reconverting bank's indorsement (or identification, if the reconverting is the paying bank) set off by asterisks on the back of the check also satisfies the requirement of preserving the previous reconverting bank's identification. 3. Legal Status of an Item That Purports To Be a Substitute Check But Is Not As described in the discussion above concerning the definition of a substitute check, a reproduction of an original check that does not have the same MICR line as the original check would not be a substitute check. However, the Board believes that a bank that transfers such an item as if that item were a substitute check should not be allowed to evade the requirements of the Check 21 Act and subpart D simply because the item it created failed to meet the substitute check definition. 15 To protect recipients of such items and to provide incentives for reconverting banks to ensure that they only transfer items that comply with subpart D, the proposed rule provides that the recipient of an item that purports to be but is not a substitute check has warranty and indemnity rights, and, where applicable, recredit and consumer awareness disclosure rights under subpart D as though the item were a substitute check. The Board requests comment on whether an item that fails to meet any of the other the substitute check requirements in § 229.2(zz) also should be treated as though it were a substitute check for those limited purposes. 15 An item could purport to be a substitute check, for example, if it contained the legal equivalence legend or if a person provided the item when applicable law required production of the original check. 4. Applicable Law Proposed § 229.52(c) incorporates the Check 21 Act's provision stating that a substitute check that meets the legal equivalence requirements is subject to any existing federal or state law as though it were the original check, to the extent that such provision is not inconsistent with the Check 21 Act. The proposed commentary to this section clarifies that a law is not inconsistent with the Check 21 Act merely because it allows for the recovery of additional damages. F. Section 229.52 Substitute Check Warranties Proposed § 229.52 of the rule implements section 5 of the Check 21 Act, which contains new warranties relating to substitute checks. For purposes of clarity, the proposed rule is organized differently than the Check 21 Act. 1. Content and Provision of the Substitute Check Warranties Proposed § 229.52(a) sets forth the content of the substitute check warranties and identifies the banks that provide, and the events that trigger provision of, those warranties. The warranties are (1) that the substitute check meets the requirements for legal equivalence ( i.e., that the substitute check accurately represents the information on the front and back of the original check and bears the legal equivalence legend) and (2) that no depositary bank, drawee, drawer, or indorser will be asked to make payment based on a check that it already has paid. In describing the second warranty, the Check 21 Act provides that none of the named parties will receive “presentment or return” of an item such that it will be asked to make a duplicative payment. However, one such recipient, the drawer, typically would not receive presentment or return of a check but rather would have its account charged for the check. The proposed rule therefore states that the named parties will not receive presentment or return of, or otherwise be charged for, a duplicative item. The Check 21 Act states that each of the two warranties is made when a bank transfers, presents, or returns a “substitute check” for consideration. However, the list of warranty recipients, which includes persons that received some other paper or electronic form of the substitute check, indicates that banks continue to provide the warranties even if they transfer and receive consideration for something that is not, but that was derived from, a substitute check. Section 229.52(a) of the proposed rule therefore provides specifically that a bank makes the warranties when it transfers, presents, or returns for consideration the substitute check or any paper or electronic representation of a substitute check. The Board notes that the Check 21 Act and the proposed rule state that the warranty against duplicative presentment or return applies such that the depositary bank, drawee, drawer, or indorser will not receive presentment or return “of the substitute check, the original check, or a copy or other paper or electronic version of the substitute check or original check” such that that person “will be asked to make a payment based on a check” it already has paid. This language could be read to exclude a situation where a second charge results from an ACH debit that was created using information from an original check or substitute check. 16 However, such an ACH debit arguably could be considered “an electronic version” of a substitute check or original check to which the duplicative payment warranty would apply. The Board specifically requests comment on whether using information from a check to create an ACH debit entry should be a payment request covered by this warranty. 16 Such “check conversions” are covered under the Board's Regulation E and rules of the National ACH Association as electronic fund transfers rather than check transactions and are not, to the Board's knowledge, treated as check transactions for any other purpose. The proposed commentary to § 229.52(a) clarifies that the reconverting bank is the first bank to provide the substitute check warranties. That discussion also notes that, when a bank is a reconverting bank because it by agreement receives a substitute check that a nonbank created, the reconverting bank starts the warranty chain for that substitute check even if the reconverting bank transfers an electronic representation of that substitute check instead of the actual substitute check that it received. The proposed commentary also clarifies that a bank that by agreement transfers an electronic version of an original check prior to the creation of the first substitute check does not make the substitute check warranties, but that parties to the agreement can allocate amongst themselves liabilities associated with the substitute check warranties. Moreover, the proposed commentary discusses the mechanics of each of the two warranties, including how they apply when multiple substitute checks are created with respect to the same payment transaction. 2. Warranty Recipients Section 5 of the Check 21 Act provides that warranties are provided to “the transferee, any subsequent collecting or returning bank, the drawee, the drawer, the payee, the depositor, and any endorser (regardless of whether the warrantee receives the substitute check or another paper or electronic form of the substitute check or original check) * * * ” Although § 229.52(b) of the proposed rule lists all these persons as warrantees, it does so in a slightly different manner than the statute. The warranties are intended to flow forward to all persons, including the paying bank, that received a substitute check or any paper or electronic representation of a substitute check, but not backward to persons that handled only the original check or some representation of the original check that was not derived from a substitute check. The rule therefore states that the warranties are provided to the recipient and any subsequent recipient, including all of the parties specifically listed in the statute, regardless of whether the recipient received the substitute check or another paper or electronic representation of the substitute check. The proposed commentary to § 229.52(b) provides additional discussion about the flow of the warranties. G. Section 229.53 Substitute Check Indemnity 1. Scope of Indemnity Section 6 of the Check 21 Act specifies the scope and amount of the substitute check indemnity, and the proposed rule incorporates this section largely unchanged. The proposed rule states that a bank that transfers, presents, or returns a substitute check or a paper or electronic representation of a substitute check for which it receives consideration shall indemnify the recipient and any subsequent recipient (including a collecting or returning bank, the depositary bank, the drawer, the drawee, the payee, the depositor, and any indorser) for any loss incurred by any recipient of a substitute check if that loss occurred due to the receipt of a substitute check instead of the original check. As with the proposed rule's language regarding the scope of the warranties, discussed in detail in the analysis of § 229.52, the proposed language regarding the scope of the substitute check indemnity clarifies that the indemnity flows to subsequent, not prior, parties that receive a substitute check or a representation of a substitute check. The proposed commentary regarding the scope of the indemnity highlights that the indemnity applies only if the first indemnified party incurred a loss due to receipt of the substitute check instead of the original check. However, a bank that paid an indemnity (other than the first reconverting bank) would in turn be eligible to make an indemnity claim even if that bank only received a representation of a substitute check. Thus, the indemnity covers losses suffered directly due to the receipt of a substitute check instead of the original check and losses incurred by providing an indemnity to another person. The proposed commentary provides several examples to illustrate the scope of the indemnity. 2. Indemnity Amount The proposed rule incorporates the statutory language regarding the indemnity amount with minor clarifications. The rule provides that the amount of the indemnity is (1) the amount of any loss (including interest, costs, reasonable attorney's fees, and other expenses of representation) caused by the breach of a substitute check warranty, or (2) in the absence of a breach of a substitute check warranty, the amount of the loss, up to the amount of the substitute check, plus interest and expenses (including costs and reasonable attorney's fees and other expenses of representation). The proposed rule supplements the statutory language by specifically stating that interest would be included in the damages proximately caused by a breach of a substitute check warranty. The proposed rule also incorporates statutory provisions regarding reduction of the indemnity amount. Section 229.53(b)(2) of the proposed rule states that the indemnity amount described in the preceding paragraph will be reduced in proportion to the amount of negligence or bad faith of the party making the indemnity claim, but that nothing in that comparative negligence section reduces any person's rights under the U.C.C. or other applicable law. Section 229.53(b)(3) of the proposed rule provides that an indemnifying bank will be liable only for losses incurred up to the time that it produces the original check or a sufficient copy of the original check, although production of that item does not absolve the indemnifying bank from liability for breaching a substitute check warranty or a warranty established under any other law. The proposed commentary to § 229.53(b) provides examples that illustrate the amount of the indemnity under various sets of facts. 3. Subrogation of Rights Section 229.53(c) of the proposed rule incorporates section 6(e) of the statute by providing that an indemnifying bank shall be subrogated to the rights of the party it indemnified to the extent of the indemnity provided and may attempt to recover from another party based on a warranty or other claim. This section also provides that the indemnified party has a duty to comply with reasonable requests for assistance made by the indemnifying bank with respect to such a claim. The proposed commentary provides an example of what would constitute a reasonable request for assistance. H. Section 229.54 Expedited Recredit for Consumers Section 7 of the statute sets forth the circumstances giving rise to a consumer expedited recredit claim, the time period and procedures for making such a claim, the conditions for a recredit, the timing and availability of a recredit, a bank's ability to reverse a recredit on a later determination that the consumer's claim was not valid, and the notices a bank must provide in connection with recredit claims. Section 229.54 of the proposed rule implements all of these provisions but reorganizes them for purposes of clarity. The Board also proposes to supplement the statutory text in certain respects in order to explicitly acknowledge certain actions that are implicit in the text of the statute. 1. Circumstances Giving Rise to a Claim Section 229.54(a) of the proposed rule provides that a consumer may make an expedited recredit claim under that section for a recredit with respect to a substitute check if the consumer asserts in good faith that (1) the bank holding the consumer's account charged that account for a substitute check that was provided to the consumer (although the consumer need not be in possession of the substitute check at the time he or she submits a claim); (2) the substitute check was not properly charged to the consumer account or the consumer has a warranty claim with respect to the substitute check; (3) the consumer suffered a resulting loss; and (4) production of the original check or a sufficient copy of the original check is necessary to determine whether or not the substitute check in fact was improperly charged or whether the consumer's warranty claim is valid. This section implements sections 7(a)(1) and 7(h) of the Check 21 Act with some organizational changes. The proposed commentary on the circumstances giving rise to a claim provides additional detail concerning when a consumer would and would not meet the criteria for bringing an expedited recredit claim under § 229.54. For example, the commentary clarifies that a consumer who receives only an image statement that contains an image of a substitute check cannot make a claim because he or she has not actually received a substitute check, although such a consumer would have redress for an improper charge associated with the substitute check under the U.C.C. and might have a claim for breach of a substitute check warranty. The commentary also notes that the warranty giving rise to a § 229.54 claim could be a substitute check warranty or any other warranty provided to the consumer in connection with the substitute check. The commentary further notes that recovery under § 229.54 is limited to the amount of the substitute check, plus interest if the consumer has an interest-bearing account, although a consumer may be able to recover additional amounts under other law, including §§ 229.52 and 229.53 of the proposed rule. 2. Procedures for Making Claims a. Timing of Claim. The Check 21 Act states that a consumer's expedited recredit claim is due before the end of the 40-day period beginning on the later of the date that the bank mailed or delivered to the consumer the periodic account statement that contains information about the transaction giving rise to the claim or the date on which the bank made the substitute check available to the consumer. Section 229.54(b)(1)(i) of the proposed rule implements this provision. The proposed rule clarifies that the 40-day time period refers to calendar days and that a bank makes a substitute check “available” by mailing or delivering it to the consumer. The statute provides that the bank must extend the consumer's time for making a claim by a reasonable period of time if the consumer cannot meet the 40-day deadline due to extenuating circumstances, such as his or her extended travel or illness. Section 229.54(b)(1)(ii) of the proposed rule includes the general provision regarding the time extension but moves to the commentary the specific examples of what constitutes an extenuating circumstance. This parallels the approach the Board took when implementing the Electronic Fund Transfer Act ( see 15 U.S.C. 1693(g) and 12 CFR 205.6(b)(4)). b. Content of Claim. Section 229.54(b)(2) of the proposed rule states that the consumer's claim must include (1) a description of the consumer's claim, including the reason why the consumer believes his or her account was improperly charged for the substitute check or the nature of his or her warranty claim with respect to such check; (2) a statement that the consumer suffered a loss and an estimate of the amount of that loss; (3) the reason why production of the original check or a sufficient copy of the original check is necessary to determine whether or not the charge to the consumer's account was proper or the consumer's warranty claim is valid; and (4) sufficient information to allow the bank to identify the substitute check and investigate the claim. The proposed rule uses the defined term “sufficient copy,” as opposed to the Check 21 Act's “better copy,” of the original check. As defined, a sufficient copy by its nature would be a better copy. The proposed commentary to § 229.54(b)(2) discusses in more detail the reasons why a charge to the consumer's account could be improper and why the original check or a sufficient copy would be necessary to determine the validity of the consumer's recredit claim. The proposed commentary also discusses what types of information a consumer should provide to facilitate the bank's investigation of a claim. c. Form and Submission of Claim. Section 229.54(b)(3) of the proposed rule incorporates the statutory provisions regarding the bank's ability to require a consumer to submit an expedited recredit claim in writing and the bank's ability to accept a written submission electronically. The proposed commentary to § 229.54(b)(3) clarifies that a bank that requires a claim to be in writing must inform the claimant of that requirement and also indicates that a communication, whether oral or written, that does not contain all the required information does not constitute a “claim” under § 229.54. Although the statute states that a bank may permit an electronic submission “if the consumer has agreed to communicate with the bank in that manner,” the proposed rule omits the quoted language. The Board believes that a consumer's act of submitting a claim electronically indicates the consumer's agreement to communicate electronically, such that the statute's agreement language is unnecessary. However, the proposed commentary notes that a bank cannot require a consumer to submit a written claim electronically. The proposed rule also clarifies that a bank that requires the consumer's claim to be in writing must compute the time period for acting on the claim from the date that the consumer submitted the written claim, even if the consumer previously provided some information relating to the claim in another form. 17 In addition, the statute measures time from the “business day” (defined as any day, other than a Saturday, Sunday, or legal holiday) on which the bank received a claim. However, the Board proposes to incorporate the term “banking day,” as it has for other parts of Regulation CC. Banking day means “that part of any business day on which an office of a bank is open to the public for carrying on substantially all of its banking functions.” The Board believes that “banking day” is an appropriate term when referring to the time at which a bank must begin measuring the time period for action. The Board requests comment on both of these adjustments relating to time period calculations. 17 The commentary to this provision clarifies that a bank that requires expedited recredit claims to be in writing must inform the consumer. 3. Action on Claims Section 7(c)(1) of the Check 21 Act requires a bank that receives a complete and timely claim for which all the prerequisites are met to recredit the consumer's account for the amount of the substitute check, plus interest if the consumer's account is an interest bearing account, unless the bank has provided the original check or a sufficient copy to the consumer and demonstrated to the consumer that the substitute check was properly charged to his or her account. Section 7(c)(2) of the Check 21 Act requires the bank to provide the recredit no later than the end of the business day following the business day on which the bank determined that the consumer's claim was valid or, if the bank has not yet determined the validity of the claim, before the end of the 10th business day after the business day on which the consumer recredited the claim. Section 7(c)(2) limits the amount that the bank is required to provide on the 10th day to the amount of the loss, up to the lesser of the amount of the substitute check or $2,500, plus interest, and requires the bank to provide the additional amount of the substitute check, if any, on the 45th calendar day following the business day on which the consumer submitted the claim. Section 7(e) of the Check 21 Act provides that a bank may reverse a recredit if it determines that the substitute check in question was properly charged to the consumer account and if it notifies the consumer. The proposed rule incorporates each of the Check 21 Act's substantive requirements regarding action on a consumer's expedited recredit claim but reorganizes those requirements in a way that the Board believes is more straightforward. The Board requests comment on whether or not its proposed reorganization of the statutory provisions regarding action on claims is an improvement over the statutory organization and encourages commenters to provide specific organizational suggestions. Section 229.54(c)(1) of the proposed rule provides that one of the bank's options for responding to a recredit claim is affirmatively to determine a consumer's claim to be valid. Although the statute does not list this possible response explicitly, the bank's ability to respond to a claim by determining that the claim is valid is implicit in the “timing of the recredit” section of the statute (section 7(c)(2)(A)), which requires the bank to provide a recredit the day after it determines that the consumer's claim is valid. The statute provides that if a bank determines that the consumer's claim is not valid, the bank must provide the consumer with the original check or a copy of the original check sufficient to determine the validity of the claim and must demonstrate why the substitute check was properly charged to the consumer account. Because the statute provides that a warranty claim may be the basis of a consumer's expedited recredit claim, § 229.54(c)(2), by reference to § 229.54(e)(2), of the proposed rule requires the bank either to demonstrate that a charge was proper or to explain why the warranty claim is not valid, as appropriate in light of the consumer's claim. Section 7(c) of the statute states that a bank must recredit the amount of the substitute check, plus interest if the account is an interest-bearing account. However, recrediting the full amount of the check could create overcompensation in some cases, such as where the consumer's allegation is that the bank charged the substitute check for the wrong amount. Section 229.54(c) of the proposed rule therefore provides that a bank must recredit the amount of the loss, up to the amount of the substitute check plus interest. If, after providing a recredit, a bank later determines that the consumer's claim is not valid, § 229.54(c)(4) of the proposed rule would allow the bank to reverse both the amount it previously recredited plus any interest that it has paid on that amount. The statute does not explicitly address the reversal of interest when reversing a recredit, and the Board specifically requests comment on whether the proposed approach is appropriate. The proposed commentary to § 229.54(c) clarifies that a bank that receives claims for multiple substitute checks in the same communication must provide the expedited recredit for each such check by the 10th day after submission, unless the bank by that date has determined whether or not the claims are valid. The commentary also clarifies that a bank may, when appropriate, reverse any amount that it previously recredited, regardless of whether such amount originally was provided after a determination that a claim was valid or pending the bank's investigation of the claim. The Board requests comment on whether additional commentary to § 229.54 would be useful and, if so, what specific points should be covered. 4. Availability of Recredit Section 7(d) of the statute provides that a bank can delay the availability of a recredit if the account is a new account or has been repeatedly overdrawn in the last six months, or if the bank has reasonable cause to suspect fraud. The proposed rule incorporates the statutory language with minor clarifications. The statute states that the new account exception applies if “the claim is made” within 30 days of establishment of the account, whereas the proposed rule provides that the exception applies if “the consumer submits the claim” within 30 days. This change clarifies when a claim “is made” in a manner that is consistent with the other time period calculations in the statute and proposed rule. The rule also reorganizes the language in the exception for prevention of fraud losses to parallel the existing exception for reasonable cause to doubt collectibility in § 229.13. The proposed commentary to § 229.54(d) clarifies that the availability of recredits provided under § 229.54(c) is governed solely by § 229.54(d) and thus is not subject to subpart B. The commentary also clarifies that the periods in § 229.54(d) are the maximum periods that the bank may delay availability. In addition, the commentary clarifies that the bank may delay availability of a recredit under § 229.54(d) only with respect to the amount of the substitute check that the bank recredits under § 229.54(c)(3)(i) pending investigation of the consumer's claim. 5. Notices Relating to Consumer Expedited Recredit Claims Section 229.54(e) of the proposed rule describes the notices required by the statute when a bank provides or reverses a recredit or denies a consumer's recredit claim. The proposed rule provides that a bank that recredits a consumer account must, no later than the business day after the banking day on which the bank provides the recredit, notify the consumer of the amount of the recredit and the date on which the recredited funds will be available for withdrawal. The proposed rule requires a bank that determines that a consumer's claim is not valid to notify the consumer no later than the business day after the banking day on which the bank makes its determination. The proposed rule provides that an invalid claim notice must include an explanation of the basis for the bank's determination that the substitute check was properly charged or the consumer's warranty claim is not valid, plus the original check or a sufficient copy of the original check. The statute requires a bank that denies a consumer's expedited recredit claim to notify the consumer that he or she may request the information or documents on which the bank relied in making its determination. However, the proposed rule allows a bank that relies on information or documents in addition to the original check or sufficient copy to provide such information or documents with the notice or to indicate that the consumer may obtain them on request. The proposed rule provides that a bank that reverses an amount it previously credited to a consumer account must notify the consumer no later than the business day after the banking day on which the bank made the reversal. This notice must include the information required for an invalid claim notice, plus the amount of the reversal, including both the amount of the recredit and the amount of paid interest, if any, being reversed, and the date on which the bank made the reversal. The proposed commentary to § 229.54(e) clarifies that a bank may provide a required notice by U.S. mail or by any other means through which the consumer has agreed to receive account information. The commentary highlights that, if a bank is required to provide an original check or sufficient copy as part of the notice, a bank that provides a notice electronically satisfies that requirement by providing an electronic image of the original check or sufficient copy, if the consumer has agreed to receive that information electronically. As discussed in the analysis of appendix C, the Board proposes model language for each of the notices required by § 229.54(e). I. Section 229.55 Expedited Recredit for Banks Section 8 of the Check 21 Act provides that a bank may make a claim against an indemnifying bank if (1) the claimant bank or a bank that the claimant bank has indemnified has received a claim for expedited recredit from a consumer or would have been subject to such a claim if the consumer account had been charged for the substitute check; (2) the claimant bank is obligated to provide a consumer expedited recredit with respect to such substitute check or otherwise has suffered a resulting loss; and (3) the production of the original check or a sufficient copy of the original check is necessary to determine the validity of the charge to the consumer account or the validity of any warranty claim connected with such substitute check. The content requirements for an interbank expedited recredit claim essentially parallel those for a consumer expedited recredit claim but also state that a bank that provides a copy of a substitute check with its claim must take steps to ensure that such copy is not mistaken for a legally equivalent substitute check or handled for forward collection or return. An indemnifying bank may require the claim to be in writing and may permit the claimant bank to submit it electronically. A claimant bank must bring its claim under section 8 of the Check 21 Act within 120 days of the transaction that gave rise to the claim, and the indemnifying bank must respond within 10 business days of receiving the claim by providing (1) a recredit, (2) the original check or a sufficient copy, (3) or information to the claimant bank as to why the indemnifying bank is not obligated to do (1) or (2). If the claimant bank later receives or reverses a recredit or otherwise receives compensation for the substitute check for which the indemnifying bank previously provided a recredit, then the claimant bank must reimburse the indemnifying bank. An indemnifying bank that provides an original check or sufficient copy also may be entitled to a refund under § 229.53 if it has provided a recredit that exceeds the losses the claimant bank sustained up to the day that the indemnifying bank provided the original check or sufficient copy. The proposed rule implements section 8 of the statute with some minor organizational and clarifying changes. The rule clarifies that bank action on a claim is required by “the end of” the 10th business day after the relevant banking day, consistent with the parallel consumer recredit provision. Moreover, the proposed rule clarifies that, when an indemnifying bank requires a claim to be in writing, the 10-day period commences with the receipt of the written claim. The proposed rule also clarifies both paragraphs of the Check 21 Act regarding the indemnifying bank's right to a refund. Section 7(c)(3) of the statute states that the “claimant bank must refund * * * any amount previously advanced by the indemnifying bank.” Without further elaboration, this provision could be read to mean that a claimant bank must give to the indemnifying bank more than the claimant bank recovered. 18 The rule makes clear that a claimant bank that receives other compensation for the substitute check does not have to refund to the indemnifying bank more than the claimant bank previously recovered from the indemnifying bank. In addition, section 8(d) of the statute provides that an indemnifying bank that produces the original check or a sufficient copy has the right to a refund under the indemnity section. Section 229.55(e)(2) of the proposed rule clarifies the statutory language by describing the amount to be refunded under that provision. 18 For example, if the claimant bank received a recredit for $150 and then received a subsequent recovery for $100, the refund to the indemnifying bank should be the amount of the recovery ($100) rather than the entire amount previously advanced ($150). The proposed commentary to § 229.55 elaborates on the rule text in several respects. The commentary highlights that a bank could have a recredit claim either because it is obligated to provide a recredit to a consumer or another bank or because it has suffered a loss as result of catching a substitute check problem that, if uncaught, could have given rise to a consumer expedited recredit claim. The commentary provides examples about the types of losses that could give rise to consumer claim and the circumstances under which a bank could bring a valid claim. The commentary also provides additional information relating to the procedures for making claims. J. Section 229.56 Liability The Check 21 Act provides for delays in an emergency in section 9, the measure of damages in section 10, and the statute of limitations and notice of claims in section 11. Section 229.56 of the proposed rule incorporates each of those sections with minor technical changes in a manner that parallels existing subpart C liability provisions in § 229.38. Section 229.56 (a) of the proposed rule provides that the amount of damages recoverable for a breach of a substitute check warranty or failure to comply with any provision of subpart D generally is limited to the amount of the loss or the substitute check, whichever is less, plus interest and expenses relating to the substitute check. This section contains exceptions, however, noting that a person could recover more than the generally applicable amount by bringing an indemnity claim or could recover less than the generally applicable amount if the person's negligence or bad faith contributed to the loss or if the person obtained a recredit under § 229.54 or § 229.55. Section 229.56(b) of the proposed rule states that delay by a bank beyond the time periods described in subpart D is excused if such delay is attributable to one of the causes specified in that paragraph. Section 229.56(c) of the proposed rule specifies the courts in which a person may bring an action to enforce subpart D and provides that such an action must be brought within one year after the cause of action accrues. The statute provides that a cause of action accrues as of the date the injured party first learns or reasonably should have learned of the facts and circumstances giving rise to the cause of action. The proposed rule clarifies that one of the facts and circumstances included in the concept of accrual is the identity of the bank against which the action is to be brought. This clarification is intended to make the date from which the statute of limitations is measured correspond to the date from which timely notice of a claim is measured. Section 229.56(d) generally provides that, unless a person gives notice of a § 229.56 claim to the warranting or indemnifying bank within 30 calendar days after the person has reason to know of both the claim and the identity of the indemnifying or warranting bank, the warranting or indemnifying bank is discharged from liability in an action to enforce a claim under subpart D to the extent of any loss caused by the delay in giving notice of the claim. However, this paragraph also states that a timely recredit claim by a consumer under § 229.54 constitutes timely notice under this paragraph. The proposed commentary to § 229.54 briefly elaborates on each of the four paragraphs of that section in a manner that corresponds to the commentary for § 229.38. K. Section 229.57 Consumer Awareness This section of the proposed rule implements section 12 of the Check 21 Act, which requires a bank to provide a consumer awareness disclosure regarding substitute checks and substitute check rights to each consumer “who receives original checks or substitute checks.” The Board believes that the quoted language, when read with the statutory provisions governing distribution of notices, indicates that section 12 disclosures are intended only for (1) consumers who routinely receive paid checks with their account statements and (2) other consumers who receive substitute checks only on a case-by-case basis. The proposed rule reflects this interpretation. The proposed rule specifically notes that, unless the bank already has provided the disclosure, a case-by-case disclosure is required when (1) a consumer receives a substitute check in response to his or her specific request for an original check or a copy of a check or (2) a check deposited by a consumer is returned unpaid to the consumer's account in the form of a substitute check. The Check 21 Act requires that when a bank provides a substitute check to a consumer in response to the consumer's request for a check, the bank must provide the consumer disclosure at the time of the request. This requirement may be impractical, however, as the bank may not know at the time of the request whether it will provide the original check, a substitute check, or some other copy of the check. Requiring the bank to provide the disclosure at the time of the request could prove unnecessarily burdensome to the bank and confusing to the consumer, because the consumer would receive a disclosure describing rights that may not apply to the item the consumer ultimately receives. The Board therefore has proposed two alternative rule provisions regarding when a bank must provide the disclosure to a consumer who requests a copy of a check. One alternative tracks the statute and requires a bank to provide the disclosure at the time of the request, but the other alternative requires provision of the disclosure at the time the bank provides the substitute check to the consumer. The Board specifically requests comment on which of these alternatives is preferable. The proposed commentary to § 229.57 indicates that a bank may use the model substitute check disclosure in appendix C and will be deemed to comply with the disclosure content requirement(s) for which it uses the model disclosure. The commentary also provides examples of when a bank must distribute the required disclosure. L. Section 229.58 Mode of Delivery The Check 21 Act discusses in several places the form in which a bank must provide required information. The proposed rule, by contrast, has a separate section regarding mode of delivery that applies to the entire subpart. Section 229.58 provides that a bank may provide any information required by subpart D by U.S. mail or by any other means through which the recipient has agreed to receive account information. This section also specifically allows a bank that is required to provide an original check or a sufficient copy to provide an electronic version of the relevant paper document if the recipient has agreed to receive that information electronically. This latter provision addresses the potential inconsistency between section 7(f)(2) as interpreted at § 229.54(e)(2), which requires a bank denying a consumer's recredit claim to provide the original check or a sufficient copy (each of which is by definition a piece of paper), with section 7(f)(4), which permits a bank to provide the notices (which presumably means all components of the notice) electronically. M. Section 229.59 Relation to Other Law This section of the proposed rule implements section 13 of the Check 21 Act by stating that the Check 21 Act and subpart D supersede any provision of federal or state law, including the U.C.C., that is inconsistent with the Check 21 Act or subpart D, but only to the extent of the inconsistency. N. Section 229.60 Variation by Agreement Section 229.60 of the proposed rule implements section 14 of the Check 21 Act by providing that any provision of § 229.55 (expedited recredit for banks) may be varied by agreement of the banks involved, but that no other provision of subpart D may be varied by agreement by any person or persons. O. Appendix C—Model Forms Section 12(c) of the Check 21 Act requires the Board to publish model forms that banks can use to satisfy the content requirements of the consumer awareness disclosure required by that section. Section 229.57 of the proposed rule lists those content requirements. The statute provides that a bank that uses the model form published by the Board to comply with § 229.57 shall be treated as complying with that section if the form accurately describes the bank's policies and practices. The Board proposes to include the required model disclosure as model C-5A in appendix C. The proposed model disclosure explains in very simple terms what a substitute check is, when the consumer expedited recredit right applies, and what a consumer must do to exercise that right. The Board requests comment on whether the proposed model disclosure is clear, accurate, and concise. Although not required by statute to do so, the Board also proposes to publish in appendix C models for the notices a bank must provide in response to a consumer's expedited recredit claim under section 7(f) of the Check 21 Act and § 229.54(e) of the proposed rule. Although there is no statutory safe harbor that applies to the proposed model notices under § 229.54(e), the Board nevertheless believes that these model notices may be helpful to banks in complying with the regulation. In light of the absence of a statutory safe harbor, the Board specifically requests comment on whether providing model language for the § 229.54(e) notices is useful. The Board proposes technical amendments to the introductory paragraph and table of contents of appendix C to reflect the inclusion of the new disclosure and notices. The Board also proposes to amend the commentary to appendix C to clarify the appropriate use of the new models. II. Other Amendments to Regulation CC The Board also is proposing at this time several amendments to existing Regulation CC and its commentary that are unrelated to the Check 21 Act. The Board requests comment on each of these proposed revisions and also welcomes comments about any other areas of the existing rule and commentary that should be clarified. A. Section 229.2 Definitions The Board proposes to amend the commentary to the definition of local paying bank (§ 229.2(s)) to provide additional detail regarding how to determine whether deposits mailed to a central check processing facility are local or nonlocal. B. Section 229.10 Next-Day Availability The Board proposes adding a sentence to the commentary to § 229.10(c) to clarify that a special deposit slip notice need not be posted at each teller window, although it must be posted in a place where consumers are likely to see it before making a deposit. C. Section 229.13 Exceptions The Board proposes to amend the commentary to § 229.13(g) regarding notices of exception holds to clarify that a bank providing such a notice electronically to a consumer must comply with the requirements of the Electronic Signatures in Global and National Commerce Act (the E-Sign Act). D. Section 229.15 General Disclosure Requirements The Board proposes to amend the commentary to § 229.15(a) regarding the general form of notices required by subpart B to clarify that a bank providing a notice electronically to a consumer must comply with the requirements of the E-Sign Act. The Board also proposes to explain in more detail in the commentary how a notice can be “clear and conspicuous,” as required in existing § 229.15(a), and under what circumstances a bank may provide a required notice in a language other than English. E. Section 229.30 Paying Bank's Responsibility for Return of Checks The Board proposes amending § 229.30(c)(1) regarding the extension for the deadline of a return or notice of nonpayment under the U.C.C. or Regulation J. The current paragraph allows extensions when a paying bank uses a means of delivery that ordinarily would result in receipt by the receiving bank's next banking day. At least one court has interpreted the current provision to permit an extension of the midnight deadline even when the check was received by a returning bank at a time that was too late for the returning bank to process the check that day ( see Oak Brook Bank v. Northern Trust, 2001 U.S. App. LEXIS 15065 (7th Cir., 2001)). The proposed rule therefore would more specifically describe the applicable time of receipt to be the bank's cutoff hour for the next processing cycle (if sent to a returning bank) or next banking day (if sent to a depositary bank). This parallels the existing language in § 229.30(c)(2). The Board proposes corresponding changes to the commentary to this section. F. Section 229.33 Notice of Nonpayment The Board proposes deleting the phrase “with question marks” at the end of § 229.33(b). Instead, the Board proposes to note in the commentary to that section that a bank must identify an item of information if the bank is uncertain as to that item's accuracy by setting the item off with question marks, asterisks, or other symbols designated for this purpose by generally applicable industry standards. This change is meant to describe the actual industry practice more closely. The Board also proposes amending the text of § 229.33(d) to state that a bank must “send or give” the consumer notice regarding receipt of a returned check or notice or nonpayment. This is meant to clarify that such a notice need not be in writing. The Board also proposes to add additional detail to the commentary to § 220.33(d) to describe the means by which a bank may provide the required notice. The Board also requests comment on whether there are circumstances under which it would be appropriate to reduce the time frame for providing a notice of nonpayment. G. Section 229.37 Variation by Agreement The Board proposes to delete an obsolete reference from the last sentence of paragraph XXIII.A of the commentary to this section. III. Specific Requests for Comment In addition to the specific requests for comment discussed in the section-by-section analysis, the Board requests comment on the following issues. A. Treatment of Generally Applicable Industry Standards As discussed at various points in the section-by-section analysis, when the Check 21 Act or existing Regulation CC refers to generally applicable industry standards, the Board proposes including only a general reference to generally applicable industry standards in the rule text. However, if only one industry standard applies, the proposed commentary would identify that standard. If the Board determines to use this approach in the final rule, it could account for changes in industry standards simply by amending the commentary and would not need to change the underlying regulatory requirement that banks comply with industry standards. The Board requests comment generally on the desirability of this approach and specifically on whether commenters would prefer that the Board identify specific industry standards within the text of the rule. B. Relation of the Check 21 Act to Other Law The proposed commentary at various points attempts to clarify the interaction between the rights and remedies conferred by the Check 21 Act and those conferred by other law, particularly the U.C.C. The Board specifically requests comment on whether the proposed commentary is adequate with respect to the interaction between the Check 21 Act and existing law or whether commenters believe that additional discussion and examples are needed. If the latter, the Board requests that commenters be as specific as possible in describing which provisions of the Check 21 Act need clarification with respect to which provisions of existing law, and in identifying examples that should be added to the commentary. C. Remotely-Created Demand Drafts In 2002, the National Conference of Commissioners on Uniform State Laws and the American Law Institute approved revisions to Articles 3 and 4 of the U.C.C. regarding remotely-created consumer items. The U.C.C. revisions define a remotely-created consumer item to mean “an item drawn on a consumer account, which is not created by the payor bank and does not bear a handwritten signature purporting to be the signature of the drawer.” The U.C.C. revisions would require a person who transfers a remotely-created consumer item to warrant that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn. The U.C.C. revisions are based on similar provisions enacted by certain individual states designed to address check fraud. (Some state laws and check clearinghouse rules refer to these items as “demand drafts.”) As noted in the U.C.C. drafter's commentary, the revisions implement a limited rejection of Price v. Neal, 97 Eng. Rep. 871 (K.B. 1762), so that in certain circumstances (those involving remotely-created consumer checks) the paying bank can use a warranty claim to absolve itself of responsibility for honoring an unauthorized item. The revisions rest on the premise that monitoring by depositary banks can control this type of fraud more effectively than any practices readily available to paying banks. The U.C.C. revisions have been adopted in at least one state and introduced in at least three others. The Board requests comment on whether it would be appropriate to incorporate the U.C.C. revisions into Regulation CC. D. Use of Plain Language Section 722 of the Gramm-Leach-Bliley Act requires the Board to use plain language in all its proposed and final rules. The Board requests comment on whether it could make the proposed regulatory language clearer and, if so, how. Paperwork Reduction Act In accordance with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the proposed rule under the authority delegated to the Board by the Office of Management and Budget (OMB). The proposed rule contains requirements subject to the PRA. The collection of information that is proposed by this rulemaking is found in 12 CFR 229.54, 229.55, and 229.57. This information is required to obtain a benefit for consumers and mandatory for financial institutions. The respondents that are regulated by the Board are state member banks and branches and agencies of foreign banks. Consumers who choose to make claims in accordance with § 229.54 of the proposed rule also would be respondents. The Board is estimating paperwork burden only for these three types of respondents; other federal banking agencies are required to estimate paperwork burden for the depository institutions for which they have administrative enforcement authority. The proposed rulemaking contains several notice requirements and a disclosure requirement in relation to the Check 21 Act. The first notice, described in § 229.54(b)(2), is the information a consumer would provide when making an expedited recredit claim. The Federal Reserve estimates that each of the 949 state member banks and 295 branches and agencies will receive, on average, 25 of these claims per year. It is also estimated that it will take consumers, on average, 15 minutes to complete and send this claim. Thus, the Federal Reserve estimates that the combined annual burden for consumers submitting expedited recredit claims is 7,775 hours. The second notice, described in § 229.54(e), is required when a bank validates the consumer's claim, denies a consumer's recredit claim, or reverses a consumer's recredit claim. The Federal Reserve estimates that each of the 949 state member banks and 295 branches and agencies will send, on average, 35 of these notices per year. It is also estimated that it will take the institutions, on average, 15 minutes to prepare and distribute each notice. Thus, the estimated total annual burden for these three bank notices is 10,885 hours. The third notice, described in § 229.55(b)(2), is required for a bank making a claim against an indemnifying bank for a substitute check. The Federal Reserve estimates that each of the 949 state member banks and 295 branches and agencies will submit, on average, 15 of these claims per year. It is also estimated that it will take institutions, on average, 15 minutes to complete and send each notice. Thus, the estimated total annual burden for this notice is 4,665 hours. Finally, § 229.57 describes the disclosure requirement that state member banks or branches and agencies of foreign banks must provide to promote consumer awareness about substitute checks. Banks are required to provide a consumer awareness disclosure to consumers who receive paid checks with their periodic statements and consumers who request or otherwise receive paid checks on a case-by-case basis. A model disclosure is provided in appendix C-5A. The Federal Reserve estimates that each of the 949 state member banks and 295 branches and agencies will, on average, have 500 disclosures per year and that, on average, it will take 5 minutes to prepare and distribute the disclosure. Thus, the estimated total annual burden for this disclosure is 51,833 hours. The Federal Reserve may not conduct or sponsor, and an organization is not required to respond to, this information collection unless it displays a currently valid OMB control number. An OMB control number will be obtained. The Federal Reserve specifically requests comment on these burden estimates as described above. Comments are also invited on: a. whether the proposed collection of information is necessary for the proper performance of the Federal Reserve's functions; including whether the information has practical utility; b. the accuracy of the Federal Reserve's estimate of the burden of the proposed information collection, including the cost of compliance; c. ways to enhance the quality, utility, and clarity of the information to be collected; and d. ways to minimize the burden of information collection on respondents, including through the use of automated collection techniques or other forms of information technology. Comments on the collections of information should be sent to Secretary, Board of Governors of the Federal Reserve System, Washington, DC 20551, with copies of such comments to be sent to the Office of Management and Budget, Paperwork Reduction Project (7100-to be obtained), Washington, DC 20503. Regulatory Flexibility Act The Board is proposing the foregoing amendments to implement the Check 21 Act and to provide clarification on existing regulatory provisions. The Check 21 Act requires the Board to publish model forms and clauses that banks may use to satisfy that statute's consumer awareness requirement. The Board also proposes to incorporate all provisions of the Check 21 Act that affect banks into existing Regulation CC, so that all federal provisions administered by the Board with respect to check collection will be described in one place. The Check 21 Act and the proposed new subpart D that would implement it apply to all banks regardless of their size. The statute and proposed rule authorize, but do not require, banks to provide a new negotiable instrument called a substitute check when an original check is required. However, no bank is required to create substitute checks, and the impact on the check processing practices of banks that only receive and do not create substitute checks should be minimal. The proposed rule does, however, require all banks to provide a consumer awareness notice to consumers who receive substitute checks and to provide a notice to a consumer who, on a case-by-case basis, seeks a recredit for a substitute check that has caused the consumer to incur a loss. These disclosure and notice requirements are statutory. The Board is not aware of any other federal rules that duplicate, overlap, or conflict with the proposed rule. The Board notes that the proposed rule is consistent with other parts of Regulation CC and the Board's Regulation J (12 CFR part 210) that apply to checks because those provisions would apply to properly-prepared substitute checks in the same manner that they apply to original checks. The Board specifically requests comment on the impact of the proposed rule on small banks. 12 CFR Chapter II List of Subjects in 12 CFR Part 229 Banks, Banking, Federal Reserve System, Reporting and recordkeeping requirements. Authority and Issuance For the reasons set forth in the preamble, the Board is proposing to amend 12 CFR part 229 to read as follows: PART 229—AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS (REGULATION CC) 1. The authority citation for part 229 is amended to read as follows: Authority: 12 U.S.C. 4001 et seq. , 12 U.S.C. 5001-5018. 2. In § 229.1, revise paragraph (a) and add a new paragraph (b)(4) to read as follows: § 229.1 Authority and purpose; organization. (a) Authority and purpose. This part is issued by the Board of Governors of the Federal Reserve System (Board) to implement the Expedited Funds Availability Act, as amended (12 U.S.C. 4001 et seq. ) (the EFA Act) and the Check Clearing for the 21st Century Act (12 U.S.C. 5001-5018) (the Check 21 Act). (b) Organization. * * * (4) Subpart D of this part contains rules relating to substitute checks. These rules address the creation and legal status of substitute checks; the substitute check warranties and indemnity; expedited recredit procedures for resolving improper charges and warranty claims associated with substitute checks; and the disclosure and notices that banks must provide to consumers who receive substitute checks and who make expedited recredit claims. 3. In § 229.2, revise the introductory sentence to read as follows: § 229.2 Definitions. As used in this part, and unless the context requires otherwise, the following terms have the meanings set forth in this section, and the terms not defined in this section have the meanings set forth in the Uniform Commercial Code: 4. In § 229.2(a): A. Redesignate existing paragraphs (1), (2), (3), (4), and (5) as paragraphs (a)(1)(i), (a)(1)(ii), (a)(1)(iii), (a)(1)(iv), and (a)(1)(v), respectively; B. Designate paragraph (a) as paragraph (a)(1) and revise the first sentence of that paragraph; C. Designate the undesignated paragraph as paragraph (2) and revise that paragraph; and D. Add a new paragraph (3). The revisions and addition read as follows: (a) Account. (1) Except for purposes of subpart D of this part, account means a deposit as defined in 12 CFR 204.2(a)(1)(i) that is a transaction account as described in 12 CFR 204.2(e). * * * (2) For purposes of subpart B of this part and, in connection therewith, this subpart A, account does not include an account where the account holder is a bank, where the account holder is an office of an institution described in paragraphs (e)(1) through (e)(6) of this section or an office of a “foreign bank” as defined in section 1(b) of the International Banking Act (12 U.S.C. 3101) that is located outside the United States, or where the direct or indirect account holder is the Treasury of the United States. (3) For purposes of subpart D of this part and, in connection therewith, this subpart A, account means any deposit, as defined in 12 CFR 204.2(a)(1)(i), at a bank. Account includes a demand deposit or other transaction account and a savings deposit or other time deposit, as those terms are defined in 12 CFR 204.2. 5. In § 229.2(e), remove the phrase “subpart C” from the last, undesignated paragraph and add the phrase “subparts C and D” in its place, and after the undesignated paragraph add a new paragraph to read as follows: (e) * * * Note: For purposes of subpart D of this part and, in connection therewith, this subpart A, bank also includes the Treasury of the United States or the United States Postal Service to the extent that the Treasury or the Postal Service acts as a paying bank. 6. In § 229.2(k), remove the phrase “subpart C” from the last sentence of the undesignated paragraph and add the phrase “subparts C and D” in its place. 7. In § 229.2(q), insert the phrase “to a collecting bank for settlement or” between the words “basis” and “to.” 8. In § 229.2(z), remove the phrase “subpart C” from the last, undesignated paragraph and add the phrase “subparts C and D” in its place, and after the undesignated paragraph add a new paragraph to read as follows: (z) * * * Note: For purposes of subpart D of this part and, in connection therewith, this subpart A, paying bank also includes the Treasury of the United States or the United States Postal Service for a check that is payable by that entity and that is sent to that entity for payment or collection. 9. In § 229.2(ff), add a new sentence after the first sentence to read as follows: (ff) * * * For purposes of subpart D of this part and, in connection therewith, this subpart A, state also means Guam, American Samoa, the Trust Territory of the Pacific Islands, the Northern Mariana Islands, and any other territory of the United States. 10. In § 229.2, revise paragraph (qq) to read as follows: (qq) Claimant bank means a bank that submits a claim for a recredit for a substitute check to an indemnifying bank under § 229.55. 11. In § 229.2, after paragraph (qq) add the following new paragraphs (rr) through (ddd), to read as follows: (rr) Collecting bank means any bank handling a check for forward collection, except the paying bank. (ss) Consumer means a natural person who— (1) With respect to a check handled for forward collection, draws the check on a consumer account; or (2) With respect to a check handled for return, deposits the check into or cashes the check against a consumer account. (tt) Customer means a person having an account with a bank. (uu) Indemnifying bank means a bank that provides an indemnity under § 229.53 with respect to a substitute check. (vv) Magnetic ink character recognition line and MICR line mean the numbers, which may include the bank routing number, account number, check number, check amount, and other information, that are printed near the bottom of a check in magnetic ink in accordance with generally applicable industry standards. (ww) Original check means the first paper check issued with respect to a particular payment transaction. (xx) Person means a natural person, corporation, unincorporated company, partnership, government unit or instrumentality, trust, or any other entity or organization. (yy) Reconverting bank means— (1) The bank that creates a substitute check; or (2) With respect to a substitute check that was created by a person that is not a bank, the first bank that receives the substitute check and transfers, presents, or returns that substitute check or, in lieu thereof, the first paper or electronic representation of that substitute check. (zz) Substitute check means a paper reproduction of an original check that— (1) Contains an image of the front and back of the original check; (2) Bears a MICR line containing all the information appearing on the MICR line of the original check, except as provided under generally applicable industry standards for substitute checks to facilitate the processing of substitute checks; (3) Conforms in paper stock, dimension, and otherwise with generally applicable industry standards for substitute checks; and (4) Is suitable for automated processing in the same manner as the original check. (aaa) A sufficient copy of an original check is a copy of an original check that accurately represents all of the information on the front and back of that check as of the time it was truncated or that otherwise is sufficient to determine the validity of the relevant claim. A copy of an original check means any paper reproduction of an original check, including a paper printout of an electronic image of the original check, a photocopy of the original check, or a substitute check. (bbb) Transfer and consideration. For purposes of subpart D, the terms transfer and consideration have the meanings set forth in the Uniform Commercial Code and in addition— (1) The term transfer with respect to a substitute check or a paper or electronic representation of a substitute check means delivery of the substitute check or other representation of the substitute check by a bank to a person other than a bank; and (2)(i) Except as provided in paragraph (bbb)(2)(ii) of this section, a bank that transfers a substitute check or a paper or electronic representation of a substitute check directly to a person other than a bank has received consideration for the substitute check or other paper or electronic representation of the substitute check if it has charged, or has the right to charge, the person's account or otherwise has received value for the check. (ii) A bank does not receive consideration when it transfers a substitute check or a paper or electronic representation of a substitute check solely in response to a person's warranty, indemnity, expedited recredit, or other claim with respect to the substitute check. (ccc) Truncate means to remove an original check from the forward collection or return process and send to a recipient, in lieu of such original check, a substitute check or, by agreement, information relating to the original check (including data taken from the MICR line of the original check or an electronic image of the original check), whether with or without the subsequent delivery of the original check. (ddd) Truncating bank means— (1) The bank that truncates the original check; or (2) If a person other than a bank truncates the original check, the first bank that transfers, presents, or returns, in lieu of such original check, a substitute check or, by agreement, information relating to the original check (including data taken from the MICR line of the original check or an electronic image of the original check), whether with or without the subsequent delivery of the original check. § 229.3 [Amended] 12. In § 229.3, remove the phrase “the Act” from paragraphs (b)(1) and (c)(2)(ii) and add the phrase “the EFA Act” in its place. § 229.20 [Amended] 13. In § 229.20, remove the phrase “the Act” wherever it appears and add the phrase “the EFA Act” in its place. § 229.21 [Amended] 14. In § 229.21(g)(2), remove the phrase “the Act” and add the phrase “the EFA Act” in its place. § 229.30 [Amended] 15. In § 229.30(a)(2)(iii), remove the next-to-last sentence and add the following sentence in its place: (a) * * * (2) * * * (iii) * * * A qualified returned check must be encoded in magnetic ink with the routing number of the depositary bank, the amount of the returned check, and a “2” or, in the case of a substitute check, a “5”, in position 44 of the MICR line as a return identifier in accordance with generally applicable industry standards. * * * 16. In § 229.30, revise paragraph (c)(1), to read as follows: (c)* * * (1) On or before the receiving bank's cutoff hour for the next processing cycle (if sent to a returning bank) or on or before the receiving bank's next banking day (if sent to the depositary bank) following the otherwise applicable deadline, for all deadlines other than those described in paragraph (c)(2) of this section; this deadline is extended further if a paying bank uses a highly expeditious means of transportation, even if this means of transportation would ordinarily result in delivery after the receiving bank's next cutoff hour or banking day referred to above; or § 229.31 [Amended] 17. In § 229.31(a)(2)(iii), remove the second-to-last sentence and add the following sentence in its place: (a) * * * (2) * * * (iii) * * * A qualified returned check must be encoded in magnetic ink with the routing number of the depositary bank, the amount of the returned check, and a “2” or, in the case of a substitute check, a “5”, in position 44 of the MICR line as a return identifier in accordance with generally applicable industry standards. * * * § 229.33 [Amended] 18. In § 229.33(b), remove the phrase “with question marks” from the last sentence of the undesignated paragraph. 19. In § 229.33(d), add the phrase “or give” between the words “send” and “notice.” § 229.35 [Amended] 20. In § 229.35, revise paragraph (a) to read as follows: (a) Indorsement standards. A bank (other than a paying bank) that handles a check during forward collection or a returned check shall indorse the check in a manner that enables a subsequent collecting bank, paying bank, or returning bank to interpret the indorsement, in accordance with the indorsement standard set forth in appendix D of this part. § 229.38 [Amended] 21. In § 229.38(d)(1), add a new sentence between the next-to-last and last sentences and revise the last sentence to read as follows: (d) Responsibility for certain aspects of checks—(1) * * * A reconverting bank is responsible for damages under paragraph (a) of this section to the extent that the condition of the back of a substitute check transferred by it adversely affects the ability of a bank to indorse the check legibly in accordance with § 229.35. Responsibility under this paragraph shall be treated as negligence of the paying bank, depositary bank, or reconverting bank for purposes of paragraph (c) of this section. 22. In § 229.38(f), remove the phrase “the Act” and add the phrase “the EFA Act” in its place. PART 229—AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS (REGULATION CC) 23. Add a new subpart D to read as follows: Subpart D—Substitute Checks Sec. 229.51 General provisions governing substitute checks. 229.52 Substitute check warranties. 229.53 Substitute check indemnity. 229.54 Expedited recredit for consumers. 229.55 Expedited recredit procedures for banks. 229.56 Liability. 229.57 Consumer awareness. 229.58 Mode of delivery of information required by this subpart. 229.59 Relation to other law. 229.60 Variation by agreement. Authority: 12 U.S.C. 5001-5018. Subpart D—Substitute Checks § 229.51 General provisions governing substitute checks. (a) Legal equivalence. A substitute check for which a bank has provided the warranties described in § 229.52 is the legal equivalent of an original check for all persons and all purposes, including any provision of federal or state law, if the substitute check— (1) Accurately represents all of the information on the front and back of the original check as of the time the original check was truncated; and (2) Bears the legend, “This is a legal copy of your check. You can use it the same way you would use the original check.” (b) Reconverting bank duties. A bank shall ensure that a substitute check for which it is the reconverting bank— (1) Bears all indorsements applied by parties that previously handled the check in any form (including the original check, a substitute check, or another paper or electronic representation of such original check or substitute check) for forward collection or return; (2) Identifies the reconverting bank in a manner that preserves any previous reconverting bank identifications, in accordance with generally applicable industry standards for substitute checks and appendix D of this part; and (3) Identifies the bank that truncated the original check in accordance with generally applicable industry standards for substitute checks and appendix D of this part. (c) Purported substitute checks. If a bank transfers, presents, or returns, and receives consideration for, an item that meets all the requirements of a substitute check except for the MICR line requirement in section 229.2(zz)(2), that item is a substitute check for purposes of §§ 229.52 through 229.57 of this subpart. (d) Applicable law. A substitute check that is the legal equivalent of an original check under paragraph (a) of this section shall be subject to any provision, including any provision relating to the protection of customers, of this part, the U.C.C., and any other applicable federal or state law as if such substitute check were the original check, to the extent such provision of law is not inconsistent with the Check 21 Act or this subpart. § 229.52 Substitute check warranties. (a) Content and provision of substitute check warranties. A bank that transfers, presents, or returns a substitute check (or a paper or electronic representation of a substitute check) for which it receives consideration warrants to the parties listed in paragraph (b) of this section that— (1) The substitute check meets the requirements for legal equivalence described in § 229.51(a)(1)-(2); and (2) No depositary bank, drawee, drawer, or indorser will receive presentment or return of, or otherwise be charged for, the substitute check, the original check, or a paper or electronic representation of the substitute check or original check such that that person will be asked to make a payment based on a check that it already has paid. (b) Warranty recipients. A bank makes the warranties described in paragraph (a) to the person to which the bank transfers, presents, or returns the substitute check or a paper or electronic representation of such substitute check and to any subsequent recipient, which could include a collecting or returning bank, the depositary bank, the drawer, the drawee, the payee, the depositor, and any indorser. These parties receive the warranties regardless of whether they received the substitute check or a paper or electronic representation of the substitute check. § 229.53 Substitute check indemnity. (a) Scope of indemnity. A bank that transfers, presents, or returns a substitute check or a paper or electronic representation of a substitute check for which it receives consideration shall indemnify the recipient and any subsequent recipient (including a collecting or returning bank, the depositary bank, the drawer, the drawee, the payee, the depositor, and any indorser) for any loss incurred by any recipient of a substitute check if that loss occurred due to the receipt of a substitute check instead of the original check. (b) Indemnity amount —(1) In general. Unless otherwise indicated by paragraph (b)(2) or (b)(3) of this section, the amount of the indemnity under paragraph (a) of this section is as follows: (i) If the loss resulted from a breach of a substitute check warranty provided under § 229.52, the amount of the indemnity shall be the amount of any loss (including interest, costs, reasonable attorney's fees, and other expenses of representation) proximately caused by the warranty breach. (ii) If the loss did not result from a breach of a substitute check warranty provided under § 229.52, the amount of the indemnity shall be the sum of— (A) The amount of any resulting loss, up to the amount of the substitute check; and (B) Interest and expenses (including costs and reasonable attorney's fees and other expenses of representation) related to the substitute check. (2) Comparative negligence. (i) If a loss described in paragraph (a) of this section results in whole or in part from the indemnified party's negligence or failure to act in good faith, then the indemnity amount described in paragraph (b)(1) of this section shall be reduced in proportion to the amount of negligence or bad faith attributable to the indemnified party. (ii) Nothing in this paragraph (b)(2) reduces the rights of a consumer or any other person under the U.C.C. or other applicable provision of state or federal law. (3) Effect of producing the original check or a sufficient copy of the original check —(i) If an indemnifying bank produces the original check or a sufficient copy of the original check, the indemnifying bank shall— (A) Be liable under this section only for losses that are incurred up to the time that the bank provides that original check or sufficient copy to the indemnified party; and (B) Have a right to the return of any funds it has paid under this section in excess of those losses. (ii) The production by the indemnifying bank of the [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A04-300. Public record. Not legal advice.