Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire

FEDERAL RESERVE SYSTEM

12 CFR Part 210

[Regulation J; Docket No. R-0821]

Collection of Checks and Other Items by Federal Reserve Banks and

Funds Transfers Through Fedwire

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is adopting amendments to subpart A of its

Regulation J, governing collection of checks and other items by Federal

Reserve Banks. The amendments, in general, conform the warranties and

various other provisions of Regulation J to recent amendments to

Regulation CC or to the Uniform Commercial Code.

EFFECTIVE DATE: June 6, 1994.

FOR FURTHER INFORMATION CONTACT: Oliver I. Ireland, Associate General

Counsel (202/452-3625), or Stephanie Martin, Senior Attorney (202/452-

3198), Legal Division; for the hearing impaired only:

Telecommunications Device for the Deaf, Dorothea Thompson (202/452-

3544).

SUPPLEMENTARY INFORMATION: Subpart A of the Board's Regulation J (12

CFR part 210) governs the collection of checks and other items by

Federal Reserve Banks. Regulation J sets out the warranties made by

institutions that send items for collection through the Federal Reserve

System as well as warranties made by Reserve Banks.1 Regulation J

also covers liability for breach of warranty, presentment of and

settlement for cash items and returned checks, and other related

issues.

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\1\As used in this docket, sender means any institution that

sends a check to a Reserve Bank for collection, and bank includes

all depository institutions, such as commercial banks, savings

institutions, and credit unions.

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In October 1992, the Board published amendments to its Regulation

CC (12 CFR part 229) that require paying banks to make same-day

settlement for certain checks presented by private-sector banks,

effective January 3, 1994 (57 FR 46956, October 14, 1992). As part of

these amendments, the Board revised the Regulation CC warranties to

require private-sector collecting, returning, and presenting banks to

warrant the accuracy of cash letter totals and check encoding. In

December 1993, the Board published proposed amendments to Regulation J

to clarify that the Reserve Banks and institutions that send items to

Reserve Banks also make the Regulation CC warranties, to conform

certain Regulation J provisions to the 1990 version of the Uniform

Commercial Code (U.C.C.), and to make other minor changes (58 FR 68566,

December 28, 1993). The Board received 10 comments on the proposed

amendments, which are discussed in the section-by-section analysis

below.

The Board has established procedures for assessing the competitive

impact of changes that have a substantial effect on payments system

participants.2 Under these procedures, the Board assesses whether

the proposed regulatory changes would have a direct and material

adverse effect on the ability of other service providers to compete

effectively with the Federal Reserve Banks in providing similar

services due to differing legal powers or constraints or due to a

dominant market position of the Federal Reserve deriving from such

legal differences. The Regulation J amendments are largely technical,

clarifying, or conform Regulation J to the rules applicable to private-

sector banks under Regulation CC and the U.C.C. The Board believes that

the amendments would not have a direct and material adverse effect on

the ability of others to compete effectively with the Federal Reserve

Banks.

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\2\These procedures are described in the Board's policy

statement ``The Federal Reserve in the Payments System'' (55 FR

11648, March 29, 1990).

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Section-by-Section Analysis

Section 210.1

This section sets forth the authority, purpose, and scope of

subpart A of Regulation J. At the suggestion of one commenter, the

Board is updating the authority citations in this section to conform

with the authority citations in the CFR. Specifically, the Board has

added a citation to section 11(j) of the Federal Reserve Act, which

authorizes the Board to exercise general supervision over the Reserve

Banks.

Section 210.2(g)

The Board proposed to amend the definition of ``item'' in keeping

with the definition of ``item'' in U.C.C. Sec. 4-104(a)(9). Under the

amended language, ``item'' would expressly include promises or orders,

such as certain bonds or other investment securities, that are handled

through the bank collection system. The Board received no comments on

this section and has adopted the amendment as proposed.

Section 210.2(p)

The Board proposed to add a definition of ``Uniform Commercial

Code'' that conforms to the definition in Regulation CC (12 CFR

229.2(ii)). The Board received no comments on this section and has

adopted the amendment as proposed.

Section 210.3(a)

The Board proposed to amend this section to set forth more

accurately the scope of the Federal Reserve Banks' operating circulars,

which include provisions for service terms and adjustments. The

amendment specifies that the operating circulars may include provisions

for adjustments of amounts, waiver of expenses, and payment of interest

by as-of adjustment.

One commenter believed that the proposed change, at least as it

relates to Reserve Bank adjustment practices, impedes the ability of

correspondent banks to compete with the Reserve Banks. This commenter

stated that the adjustment accounting practices of its local Reserve

Bank require intercept processors and depository institutions to engage

in a burdensome reconcilement process. The commenter stated that the

Board should not incorporate the operating circulars into Regulation J.

The proposed amendments, however, would not incorporate the

operating circulars into Regulation J, but rather would provide greater

detail as to the scope of the operating circulars. Issues related to

adjustment posting alternatives generally can be settled between the

Reserve Bank and the parties involved and would not be affected by the

proposed amendment to Regulation J. Thus, the Board has adopted the

amendment as proposed.

Section 210.3(f)

The Board proposed to add a new paragraph to Sec. 210.3 to clarify

that Regulation J supersedes the U.C.C., other state laws, and

Regulation CC to the extent of any inconsistency. This provision

parallels Sec. 229.41 of Regulation CC, which provides that Regulation

CC supersedes the U.C.C. and other state law to the extent of the

inconsistency. The Board received no comments on this section and has

adopted the amendment as proposed.

Section 210.5(a)

The Board proposed to amend Sec. 210.5(a) to conform the warranties

made by banks that send items to Reserve Banks to the transfer and

presentment warranties in U.C.C. 4-207 and 4-208. A sender would

warrant that it was (or acted on behalf of a person who was) entitled

to enforce the item. The U.C.C. substituted the concept of ``person

entitled to enforce'' for ``person with good title'' in recognition

that the right to enforce an instrument is not limited to holders. In

addition, the proposed amendment would require the sender to warrant

that the item was not altered, dropping the adverb ``materially.'' The

U.C.C. formerly incorporated the concept of a ``material'' alteration

as one that changed the contract of the parties in any respect. The

revised U.C.C. refers to such a change simply as an alteration.

Finally, the proposed amendment would clarify that the sender also

makes the warranties set forth in Regulation CC and that the Regulation

J warranties may not be disclaimed and are made regardless of whether

the sender's indorsement appears on the item.

One commenter was concerned that dropping the word ``materially''

would mean that repair of MICR encoding on a check that rejects from

automated processing would constitute an alteration. Section 3-407 of

the U.C.C. defines ``alteration'' as an unauthorized change that

purports to modify the obligation of a party or an unauthorized

addition of words or numbers or other change to an incomplete

instrument relating to the obligation of a party. The 1990 version of

the U.C.C. appears to use the terms ``alteration'' synonymously with

the former term ``material alteration'' (see Official Comment (1) to

U.C.C. 3-407). MICR repair, which is intended to facilitate check

collection and not to affect the obligations of the parties to a check,

is unlikely to be considered an alteration.

Sections 210.5(d) and 210.12(i)

The Board proposed to add new paragraph (d) to Sec. 210.5 and new

paragraph (i) to Sec. 210.12 to give a Reserve Bank a security interest

in a sender's or prior collecting or returning bank's assets held by

the Reserve Bank. The security interest would attach when a warranty is

breached or other obligation is incurred. The proposed provisions were

based on similar provisions in subpart B of Regulation J, which gives a

Reserve Bank a security interest in the assets of a sender of a payment

order to secure overdrafts and other obligations (Sec. 210.28(b) (3)

and (4)).

Two commenters were concerned that the proposal would give Reserve

Banks greater rights than private-sector banks to resolve warranty

breach issues. One of the commenters stated that the proposal appeared

to give Reserve Banks a complete self-remedy for breaches absent a

court order or agreement of the parties. The commenter noted that

security interests under Sec. 210.28 are designed to secure overdrafts,

which are easily determinable, as opposed to warranty breaches, which

are often a matter of dispute. The commenter requested that the

proposal be clarified to provide that security interests do not attach

and a Reserve Bank may not set off or realize upon collateral without a

judicial determination or agreement of the parties.

Section 9-501(5) of the U.C.C. provides that when a claim of a

secured party is reduced to judgment, the secured party's lien on

collateral relates back to the date the security interest was

perfected. Accordingly, the Board believes that a Reserve Bank's

security interest in the assets of a warranting bank should attach on

the date the warranty is breached (generally the date the Reserve Bank

handles the check in question) so that the Reserve Bank may take

actions to protect its collateral, if necessary, as discussed below.

The Monetary Control Act of 1980 (12 U.S.C. 248a) directed the

Board and the Reserve Banks to establish and set prices for services

with due consideration to ensuring an adequate level of services

nationwide. In keeping with this directive, the Board expects that

Reserve Banks will provide check collection services to financially

troubled banks that cannot obtain services elsewhere. If a troubled

bank fails, the Reserve Bank may be liable on warranty claims that it

cannot pass back to the failed bank. Accordingly, the Board believes

that it is appropriate to provide some protection to the Reserve Banks

from pending insolvencies. Thus, the Board has adopted the proposed

security interest provisions, with modifications.

The modifications to Secs. 229.5(d) and 229.12(i) clarify when a

default occurs. Specifically, a Reserve Bank's rights to take any

action under those sections will apply only: (1) If the Reserve Bank,

in its sole discretion, deems itself insecure and gives notice thereof

to the sender or (2) at the time the sender suspends payments and is

closed. The Board believes that requiring the Reserve Bank to advise a

bank of its concerns about the bank's solvency will prevent the routine

use of set-off or other actions on collateral by Reserve Banks. The

Board believes that private-sector banks often reserve the right under

security agreements to take steps, such as placing a hold on

collateral, to protect themselves in cases where the banks consider

themselves insecure.

Under the final rule, when a Reserve Bank receives notice of a

warranty claim based on alleged forged indorsement or alteration, it

would pass the notice back to the bank from which it received the

check. The Reserve Bank would not, however, unilaterally pass judgment

on such a claim. Rather, the Reserve Banks' uniform operating circulars

provide that they will process adjustments for these types of warranty

claims only with the agreement of the prior collecting bank. If such

agreement is not forthcoming, the Reserve Bank would wait to be sued on

the warranty claim and would tender defense of the suit to the prior

collecting bank under Secs. 210.5 (b) and (c) and 210.12 (e) and (f) of

Regulation J. Entries would be made or collateral disposed of only

after judgment as provided in those sections. The amendments to

Secs. 229.5(d) and 229.12(i), however, would not require a sender bank

to fail or a Reserve Bank to deem itself insecure before the Reserve

Bank could make credit or debit adjustments to reserve or clearing

accounts in accordance with adjustment procedures established in

Reserve Bank operating circulars.

Section 210.6(b)

The Board proposed to amend Sec. 210.6(b) to conform the Reserve

Bank warranties to the transfer and presentment warranties in U.C.C. 4-

207 and 4-208. (See discussion of Sec. 210.5(a).) The amendment

clarifies that the Reserve Banks make the warranties set out in

Sec. 229.34 of Regulation CC. The Board received no comments on this

section and has adopted the amendment as proposed.

Section 210.6(c)

Section 210.6(c) provides a 2-year statute of limitations for

claims against Reserve Banks for lack of good faith or failure to

exercise ordinary care under Regulation J. The Board proposed to amend

this section to clarify that the Regulation CC limitation period of one

year would apply to any claims against a Reserve Bank under Regulation

CC, such as breach of a warranty under Sec. 229.34 or lack of good

faith or failure to exercise ordinary care under Sec. 229.38. This

amendment clarifies that claims against Reserve Banks for Regulation CC

violations are subject to the same time limitations as those against

private-sector banks.

The Board received three comments on this section. Two commenters

believed that limitation period for breach of Regulation CC warranties

should be two years rather than one year. One of these commenters often

receives adjustment requests from the IRS one to two years after the

fact and does not wish to be precluded from pursuing such adjustments

with a Reserve Bank. This commenter suggested that the Regulation CC

limitation period be extended to 2 years. Another commenter noted that,

if the one year limitation period is adopted, it should run from the

date of the last entry for the check in question rather than from the

date the check first cleared.

The Board believes that the same limitation period should apply to

Reserve Banks and private-sector banks for Regulation CC violations. As

Regulation CC provides a one-year statute of limitations, the Board

does not believe Regulation J should lengthen this period for Reserve

Banks and has adopted the proposed amendment. The one-year period was

established in subpart C of Regulation CC to match the one-year

limitation period for subpart B (funds availability) violations, which

was set by statute. As provided in Regulation CC Sec. 229.38(g), an

action must be brought within one year after the date of the occurrence

of the violation involved.

Section 210.9(a)(5)

Section 210.9(a)(5) provides that paying banks must settle for

checks presented by Reserve Banks by ``autocharge'' (i.e. a debit to an

account at a Reserve Bank), cash, or other means agreed to by the

Reserve Bank. The Board proposed to amend this section to clarify that

a Reserve Bank may, in its discretion, elect to obtain settlement by

autocharging the account of the paying bank for the amount of a cash

letter. Virtually all Reserve Bank presentments are settled via

autocharge. This amendment would restate the autocharge provisions that

currently are set out in the Reserve Banks' uniform cash item operating

circular.

The Board also proposed to amend this section to provide that

paying banks that receive presentment from Reserve Banks may not set

off other claims against the amount of settlement owed to the Reserve

Bank. Paying banks may set off against private-sector presenting banks

under Sec. 229.34(c)(4) of Regulation CC. The Regulation CC set-off

provision was designed to protect paying banks under the same-day

settlement rule, which requires paying banks to accept presentment from

and settle with all presenting banks, some of which may be in poor

financial condition. If a paying bank overpays a cash letter in

reliance on a cash letter total or check encoding warranted by the

presenting bank, it could face the risk that the presenting bank would

be unable to settle for adjustments. Protection against insolvency risk

would not be necessary against a Reserve Bank. In addition, as banks

generally settle with Reserve Banks via autocharge, set-off against a

Reserve Bank would be impractical. Therefore, the Board does not

believe this amendment would have a direct and material adverse effect

on the ability of private-sector banks to compete effectively with

Reserve Banks.

The Board received no comments on this section and has adopted the

amendments as proposed.

Section 210.12(a)

Section 210.12(a) provides that a paying bank that has settled for

a check presented by a Reserve Bank may return the check in accordance

with Regulation CC, the U.C.C., and the Reserve Bank's operating

circular. The Board proposed to amend this section to clarify that the

paying bank may also return a check prior to settlement in accordance

with Sec. 210.9(a) of Regulation J and the Reserve Bank's operating

circular. This amendment would clarify that a paying bank would have

the same return rights under Regulation J as under Regulation CC and

the U.C.C. The Board received no comments on this section and has

adopted the amendment as proposed.

Section 210.12(c)

Section 210.12(c) sets out the warranties and agreements made by a

bank that sends a returned check to a Reserve Bank. The Board proposed

to amend this section to clarify that, in addition to the warranties

set forth in Sec. 229.34 of Regulation CC, the sender also makes any

applicable warranty under state law. For example, the amendment would

clarify that a depositary bank that settled for a returned check could

recover the amount paid plus expenses and lost interest from a prior

bank that breached a transfer warranty, in accordance with U.C.C. 4-

208(d). In addition, similar to the amendments to Sec. 210.5(a), the

proposed revisions to this paragraph would clarify that the Regulation

J warranties may not be disclaimed and are made regardless of whether

the sender's indorsement appears on the item. These amendments restate

provisions that are already applicable to private-sector banks under

Regulation CC and the U.C.C. The Board received no comments on this

section and has adopted the amendments as proposed.

Section 210.12(d)

The Board proposed to add a new paragraph (d) to Sec. 210.12 to

clarify that when a Reserve Bank transfers and receives settlement for

a returned check, it makes the warranties set out in Sec. 229.34 of

Regulation CC. In addition, the new paragraph would parallel revised

Sec. 210.6(b) (governing Reserve Bank warranties for cash items) by

providing a limitation of the Reserve Bank's liabilities, other than

those allowed for in Regulation J, to the Reserve Bank's own lack of

good faith or failure to exercise ordinary care. (The amendments

redesignate current Secs. 210.12(d) through (g) as Secs. 210.12(e)

through (h).) The Board received no comments on this section and has

adopted the amendments as proposed.

Section 210.12(e) (Formerly 210.12(d)) and Section 210.5(b)

The U.C.C. (3-119) and Regulation CC (Sec. 229.34(e)) provide that

a bank that receives a tender of defense may in turn tender defense to

a prior bank in the collection or return chain. Unless the prior bank

comes in and defends, it is bound by the determination of fact common

to the current litigation and any subsequent litigation.

Section 210.5(b) of Regulation J provides that, when a Reserve Bank

tenders defense to a sender as a result of a tender to it, the Reserve

Bank need not be a defendant in the suit in order to recover from the

sender any losses that it incurs because of the judgment, so long as

the judgment addresses the fact issue of breach of warranty. The Board

adopted this provision in 1986 in order to reduce litigation and

provide a more efficient way of handling forged indorsement cases (51

FR 21740, June 16, 1986). Due to an oversight, when the Board amended

Sec. 210.12 to provide a similar rule for returned checks, the language

did not match that of Sec. 210.5(b) and could have been interpreted to

apply only when a Reserve Bank is a defendant (53 FR 21983, June 13,

1988). The Board proposed to amend Sec. 210.12(e) to conform it to

Sec. 210.5(b). (The amendments redesignate current Sec. 210.12(d) as

Sec. 210.12(e) and add a new paragraph (d) as discussed above.) The

Board also proposed to correct a typographical error in Sec. 210.5(b).

The Board received no comments on this section and has adopted the

amendments as proposed.

Section 210.12(h) (Formerly 210.12(g))

This section provides that a depositary bank must settle for

returned checks received from a Reserve Bank in the same manner as it

settles for cash items presented by the Reserve Bank. The Board

proposed to amend this section to clarify that settlement for returned

checks also must be made by the same time as settlement for cash items,

as provided in Sec. 210.9(a). The Board received no comments on this

section and has adopted the amendment as proposed.

Section 210.13(a)

Section 210.13(a) authorizes a Reserve Bank that does not receive

payment for an item to charge back the account of the sender, paying

bank, or returning bank from which the item was received. The Board

proposed to amend this section to clarify that a Reserve Bank also may

charge the account of a prior collecting bank through which the item

was received. This amendment is consistent with Sec. 229.35(b) of

Regulation CC, which allows a bank that handles a check or returned

check to recover from any prior indorser in the event that the bank

does not receive payment for the check from a subsequent bank in the

collection or return chain. In the event of such a recovery by a

Reserve Bank, Sec. 229.13(a) provides that no bank or person in the

forward collection or return chain would have an interest in any funds

in the Reserve Bank's possession of the bank that failed to pay. The

amendment would clarify that, when a Reserve Bank charges back an item,

this limitation of interest applies only when a bank or person seeks

payment of the amount of the item out of funds or property held by the

Reserve Bank. The Board received no comments on this section and has

adopted the amendment as proposed.

Section 210.13(b)

Section 210.13(b) provides that a Reserve Bank will not debit an

institution's reserve account for drafts or other orders on the account

after receiving notice that the institution has been closed. The Board

proposed to amend this section to clarify that Reserve Banks will not

charge an account as authorized by Sec. 210.9(a)(5) after receiving

notice the institution is closed. The amendment also would clarify that

this section applies only to charges to reserve accounts to settle for

items (including returned checks) and does not affect the Reserve

Bank's security interest under proposed Secs. 210.5(d) and 210.12(i).

The Board received no comments on this section and has adopted the

amendments as proposed.

Section 210.14

Section 210.14 describes those circumstances under which the time

limits for acting on an item may be extended, such as interruption of

communication facilities, suspension of payments by a bank, and other

emergency conditions. The Board proposed to amend this section to

clarify that computer and equipment failure would constitute emergency

conditions. This amendment is consistent with the emergency provisions

in Sec. 229.38(e) of Regulation CC and U.C.C. 4-109(b). The Board

received no comments on this section and has adopted the amendment as

proposed.

Final Regulatory Flexibility Analysis

Two of the three requirements of a final regulatory flexibility

analysis (5 U.S.C. 604), (1) a succinct statement of the need for and

the objectives of the rule and (2) a summary of the issues raised by

the public comments, the agency's assessment of the issues, and a

statement of the changes made in the final rule in response to the

comments, are discussed above. The third requirement of a final

regulatory flexibility analysis is a description of significant

alternatives to the rule that would minimize the rule's economic impact

on small entities and reasons why the alternatives were rejected. The

amendments apply to all depository institutions that receive items from

or send items to Federal Reserve Banks, regardless of size. The

amendments generally clarify rights and duties of banks and do not

impose any substantial economic burden on small entities.

List of Subjects in 12 CFR Part 210

Banks, Banking, Check collection.

For the reasons set out in the preamble, 12 CFR part 210 is amended

as follows:

PART 210--COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE

BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)

1. The authority citation for part 210 is revised to read as

follows:

Authority: 12 U.S.C. 248 (i), (j), and (o), 342, 360, 464, and

4001-4010.

2. The first sentence of Sec. 210.1 is revised to read as follows:

Sec. 210.1 Authority, purpose, and scope.

The Board of Governors of the Federal Reserve System (Board) has

issued this subpart pursuant to the Federal Reserve Act, sections 11

(i) and (j) (12 U.S.C. 248 (i) and (j)), section 13 (12 U.S.C. 342),

section 16 (12 U.S.C. 248(o) and 360), and section 19(f) (12 U.S.C.

464); the Expedited Funds Availability Act (12 U.S.C. 4001 et seq.);

and other laws. * * *

3. In Sec. 210.2, paragraph (g) introductory text is revised and a

new paragraph (p) is added immediately before the concluding text to

read as follows:

Sec. 210.2 Definitions.

* * * * *

(g) Item means an instrument or a promise or order to pay money,

whether negotiable or not, that is:

* * * * *

(p) Uniform Commercial Code means the Uniform Commercial Code as

adopted in a state.

* * * * *

4. In Sec. 210.3, the last sentence of paragraph (a) is revised and

a new paragraph (f) is added to read as follows:

Sec. 210.3 General provisions.

(a) * * * The circulars may, among other things, classify cash

items and noncash items, require separate sorts and letters, provide

different closing times for the receipt of different classes or types

of items, set forth terms of services, and establish procedures for

adjustments on a Reserve Bank's books, including amounts, waiver of

expenses, and payment of interest by as-of adjustment.

* * * * *

(f) Relation to other law. The provisions of this subpart supersede

any inconsistent provisions of the Uniform Commercial Code, of any

other state law, or of part 229 of this title, but only to the extent

of the inconsistency.

5. In Sec. 210.5, paragraph (a) introductory text and paragraph

(a)(2) are revised, in paragraph (b)(3) the phrase ``judgment or decree

of the tender of defense'' is revised to read ``judgment or decree or

the tender of defense'', and a new paragraph (d) is added to read as

follows:

Sec. 210.5 Sender's agreement; recovery by Reserve Bank.

(a) Sender's agreement. The warranties, authorizations, and

agreements made pursuant to this paragraph may not be disclaimed and

are made whether or not the item bears an indorsement of the sender. By

sending an item to a Reserve Bank, the sender:

* * * * *

(2) Warrants to each Reserve Bank handling the item that:

(i) The sender is a person entitled to enforce the item or

authorized to obtain payment of the item on behalf of a person entitled

to enforce the item; and

(ii) The item has not been altered; but this paragraph (a)(2) does

not limit any warranty by a sender or other prior party arising under

state law or under subpart C of part 229 of this title; and

* * * * *

(d) Security interest. To secure any obligation due or to become

due to a Reserve Bank by a sender or prior collecting bank under this

subpart or subpart C of part 229 of this title, the sender and prior

collecting bank, by sending an item directly or indirectly to the

Reserve Bank, grant to the Reserve Bank a security interest in all of

the sender's or prior collecting bank's assets in the possession of, or

held for the account of, the Reserve Bank. The security interest

attaches when a warranty is breached or any other obligation to the

Reserve Bank is incurred. If the Reserve Bank, in its sole discretion,

deems itself insecure and gives notice thereof to the sender or prior

collecting bank, or if the sender or prior collecting bank suspends

payments or is closed, the Reserve Bank may take any action authorized

by law to recover the amount of an obligation, including, but not

limited to, the exercise of rights of set off, the realization on any

available collateral, and any other rights it may have as a creditor

under applicable law.

6. In Sec. 210.6, paragraphs (b)(1) and (b)(2) are revised, a new

first sentence is added to paragraph (b) concluding text, and a new

last sentence is added to paragraph (c) to read as follows:

Sec. 210.6 Status, warranties, and liability of Reserve Bank.

* * * * *

(b) * * *

(1) That the Reserve Bank is a person entitled to enforce the item

(or is authorized to obtain payment of the item on behalf of a person

who is either:

(i) Entitled to enforce the item; or

(ii) Authorized to obtain payment on behalf of a person entitled to

enforce the item); and

(2) That the item has not been altered.

The Reserve Bank also makes the warranties set forth in Sec. 229.34(c)

of this title, subject to the terms of part 229 of this title. * * *

(c) * * * This paragraph does not lengthen the time limit for

claims under Sec. 229.38(g) of this title (which include claims for

breach of warranty under Sec. 229.34 of this title).

7. In Sec. 210.9, paragraph (a)(5) is revised to read as follows:

Sec. 210.9 Settlement and payment.

(a) * * *

(5) Settlement with a Reserve Bank under paragraphs (a)(1) through

(4) of this section shall be made by debit to an account on the Reserve

Bank's books, cash, or other form of settlement to which the Reserve

Bank agrees, except that the Reserve Bank may, in its discretion,

obtain settlement by charging the paying bank's reserve or clearing

account. A paying bank may not set off against the amount of a

settlement under this section the amount of a claim with respect to

another cash item, cash letter, or other claim under Sec. 229.34(c) of

this title or other law.

* * * * *

8. In Sec. 210.12, a new sentence is added after the first sentence

of paragraph (a), paragraph (c) introductory text and paragraph (c)(2)

are revised, paragraphs (d) through (g) are redesignated as paragraphs

(e) through (h), respectively, new paragraphs (d) and (i) are added,

and newly-designated paragraph (e) concluding text and newly-designated

paragraph (h) are revised to read as follows:

Sec. 210.12 Return of cash items and handling of returned checks.

(a) * * * A paying bank that receives a cash item directly or

indirectly from a Reserve Bank also may return the item prior to

settlement, in accordance with Sec. 210.9(a) and its Reserve Bank's

operating circular. * * *

* * * * *

(c) Paying bank's and returning bank's agreement. The warranties,

authorizations, and agreements made pursuant to this paragraph may not

be disclaimed and are made whether or not the returned check bears an

indorsement of the paying bank or returning bank. By sending a returned

check to a Reserve Bank, the paying bank or returning bank--

* * * * *

(2) Makes the warranties set forth in Sec. 229.34 of this title

(but this paragraph does not limit any warranty by a paying or

returning bank arising under state law); and

* * * * *

(d) Warranties by Reserve Bank. By sending a returned check and

receiving settlement or other consideration for it, a Reserve Bank

makes the returning bank warranties as set forth in Sec. 229.34 of this

title, subject to the terms of part 229 of this title. The Reserve Bank

shall not have or assume any other liability to the transferee

returning bank, to any subsequent returning bank, to the depository

bank, to the owner of the check, or to any other person, except for the

Reserve Bank's own lack of good faith or failure to exercise ordinary

care as provided in subpart C of part 229 of this title.

(e) * * *

The Reserve Bank may, upon the entry of a final judgment or decree,

recover from the paying bank or returning bank the amount of attorneys'

fees and other expenses of litigation incurred, as well as any amount

the Reserve Bank is required to pay because of the judgment or decree

or the tender of defense, together with interest thereon.

* * * * *

(h) Settlement. A subsequent returning bank or depositary bank

shall settle for returned checks in the same manner and by the same

time as for cash items presented for payment under this subpart.

(i) Security interest. To secure any obligation due or to become

due to a Reserve Bank by a paying bank, returning bank, or prior

returning bank under this subpart or subpart C of part 229 of this

title, the paying bank, returning bank, and prior returning bank, by

sending a returned check directly or indirectly to the Reserve Bank,

grant to the Reserve Bank a security interest in all of the paying

bank's, returning bank's, and prior returning bank's assets in the

possession of, or held for the account of, the Reserve Bank. The

security interest attaches when a warranty is breached or any other

obligation to the Reserve Bank is incurred. If the Reserve Bank, in its

sole discretion, deems itself insecure and gives notice thereof to the

paying bank, returning bank, or prior returning bank, or if the paying

bank, returning bank, or prior returning bank suspends payments or is

closed, the Reserve Bank may take any action authorized by law to

recover the amount of an obligation, including, but not limited to, the

exercise of rights of set off, the realization on any available

collateral, and any other rights it may have as a creditor under

applicable law.

9. Section 210.13 is revised to read as follows:

Sec. 210.13 Unpaid items.

(a) Right of recovery. If a Reserve Bank does not receive payment

in actually and finally collected funds for an item, the Reserve Bank

shall recover by charge-back or otherwise the amount of the item from

the sender, prior collecting bank, paying bank, or returning bank from

or through which it was received, whether or not the item itself can be

sent back. In the event of recovery from such a party, no party,

including the owner or holder of the item, shall, for the purpose of

obtaining payment of the amount of the item, have any interest in any

reserve balance or other funds or property in the Reserve Bank's

possession of the bank that failed to make payment in actually and

finally collected funds.

(b) Suspension or closing of bank. A Reserve Bank shall not pay or

act on a draft, authorization to charge (including a charge authorized

by Sec. 210.9(a)(5)), or other order on a reserve balance or other

funds in its possession for the purpose of settling for items under

Sec. 210.9 or Sec. 210.12 after it receives notice of suspension or

closing of the bank making the settlement for that bank's own or

another's account.

10. Section 210.14 is revised to read as follows:

Sec. 210.14 Extension of time limits.

If a bank (including a Reserve Bank) or nonbank payor is delayed in

acting on an item beyond applicable time limits because of interruption

of communication or computer facilities, suspension of payments by a

bank or nonbank payor, war, emergency conditions, failure of equipment,

or other circumstances beyond its control, its time for acting is

extended for the time necessary to complete the action, if it exercises

such diligence as the circumstances require.

By order of the Board of Governors of the Federal Reserve

System, April 28, 1994.

William W. Wiles,

Secretary of the Board.

[FR Doc. 94-10645 Filed 5-3-94; 8:45 am]

BILLING CODE 6210-01-P