Indorsement and Payment of Checks Drawn on the United States Treasury

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 240

RIN 1510-AA45

Indorsement and Payment of Checks Drawn on the United States

Treasury

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Proposed rule.

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SUMMARY: This rule revises 31 CFR Part 240, which governs the

indorsement and payment of checks drawn on the United States Treasury.

The changes are intended both to fix the time by which Treasury can

decline payment on Treasury checks and to provide financial

institutions with a date certain for final payment. These rules also

provide greater clarity by defining previously undefined terms and by

ensuring symmetry with current Treasury regulations governing Federal

payments utilizing the automated clearing house method. This rule also

provides that Treasury may instruct Federal Reserve Banks to intercept

and return, unpaid, benefit payment checks issued to deceased payees.

These proposed revisions are issued in response to concerns raised by

financial institutions, Federal agencies, and other affected parties.

DATES: Comments must be submitted on or before November 6, 1995.

ADDRESSES: All comments concerning these proposed regulations should be

addressed to Ronald Brooks, Senior Program Analyst, Financial

Processing Division, Financial Management Service, Prince Georges

Center II Building, 3700 East-West Highway, Room 725-D, Hyattsville,

Maryland 20782. Comments may be faxed to (202) 874-7534.

FOR FURTHER INFORMATION CONTACT: Ronald Brooks, (202) 874-7620 (Senior

Program Analyst, Financial Processing Division); Paul M. Curran, (202)

874-6680 (Principal Attorney).

SUPPLEMENTARY INFORMATION:

Limitations on Payment

The current regulation provides that Treasury shall have the right

to conduct first examination of Treasury checks presented for payment,

and to refuse payment of any checks within a reasonable time. The

current regulation also provides that such checks shall be deemed paid

only upon Treasury's completion of first examination. The proposed rule

clarifies this in two ways.

First, it defines first examination, and defines material defects

or alterations as including counterfeit checks. These definitions are

consistent with Treasury's longstanding interpretation of these terms.

Second, it fixes the time by which Treasury must complete first

examination, and provides that if Treasury fails to do so within 150

days, the check will be deemed paid. This change narrows the time by

which Treasury must complete first examination since Treasury

interprets the current regulation as affording up to one year for first

examination. This proposed change is intended to accommodate financial

institutions which seek not only a more compressed time frame for first

examination but also a date certain for final payment of Treasury

checks.

While Treasury will, in most cases, complete first examination

within 30 days of presentment of a Treasury check to a Federal Reserve

Bank, the 150 day maximum period affords Treasury sufficient time to

complete first examination in certain problem cases. For example, up to

150 days may be required in instances where there are delays in

Treasury's obtaining from check certifying or authorizing agencies the

payment issue tapes necessary to complete first examination.

Recovery by Bank From Depositors

The proposed rule clarifies that the regulations contained in this

part neither authorize nor direct any financial institution to debit

the account of any depositor. It further clarifies that any financial

institution's right of recovery against depositors is derived from both

the depository contracts with its customers and any self-help remedies

authorized by State law governing the relationship between financial

institutions and their customers. This provision mirrors the

regulations codified in 31 CFR Part 210, which pertains to ``Federal

Payments Through Financial Institutions By the Automated Clearing House

Method.''

Deceased Payee Check Intercepts

Currently, where a benefit payment check has been issued and

negotiated after a payee's death, Treasury generally recovers the funds

from financial institutions through the reclamation process. Financial

institutions have expressed dissatisfaction with these procedures

because Treasury reclamation actions only occur after final payment and

because in many instances the depositors have closed their accounts or

withdrawn most or all of the funds. These financial institutions seek a

process by which Treasury can intercept such checks upon presentment

and return such checks unpaid before the financial institutions are

required under Federal Reserve Regulation CC (12 C.F.R. Part 229) to

make funds permanently available to their depositors. This proposed

rule responds to those concerns, and should result in a lower volume of

payments to nonentitled payees.

Specifically, it clarifies that benefit payment checks issued after

a payee's death are not payable. It also sets forth procedures by which

Treasury will instruct the Federal Reserve to intercept such checks

upon presentment and return unpaid those checks which are successfully

intercepted to the depositary banks.

Rulemaking Analysis

It has been determined that this regulation is not a significant

regulatory action as defined in E.O. 12866. Therefore, a Regulatory

Assessment is not required.

It is hereby certified pursuant to the Regulatory Flexibility Act

that this revision will not have a significant economic impact on a

substantial number of small business entities. Accordingly, a

Regulatory Flexibility Act analysis is not required.

These regulations impose time frames within which final payment of

Treasury checks must be accomplished, and establish consequences for

the failure of Treasury to honor those time frames. Consequently, these

regulations provide financial institutions with greater certainty

regarding the entire payment process, and place higher standards of

performance on Treasury in its processing of checks.

The other principal provision of these regulations will reduce the

likelihood that final payment on Treasury checks will be made to

nonentitled persons. Treasury's efficiency and its ability to serve the

needs of legitimate payees of benefit programs will thereby be

enhanced.

Notice and Comment

Public Comment is solicited on all aspects of this proposed

regulation. Treasury will consider all comments made on the substance

of this proposed regulation, but does not intend to hold hearings.

[[Page 48941]]

List of Subjects in 31 CFR Part 240

Checks, Counterfeit Checks, Forgery, Banks, Banking, Guarantees,

Federal Reserve System.

For the reasons set out in the preamble, 31 CFR Part 240 is

proposed to be amended as follows.

PART 240--INDORSEMENT AND PAYMENT OF CHECKS DRAWN ON THE UNITED

STATES TREASURY

1. The authority citation for part 240 is revised to read as

follows:

Authority: 5 U.S.C. 301; 12 U.S.C. 391; 31 U.S.C. 321; 31 U.S.C.

3328; 31 U.S.C. 3331; 31 U.S.C. 3334; 31 U.S.C. 3343; 31 U.S.C.

3711; 31 U.S.C. 3712; 31 U.S.C. 3716; 31 U.S.C. 3717.

2. Section 240.2 is revised to read as follows:

Sec. 240.2 Definitions.

(a) Agency means any department, instrumentality, office,

commission, board, service, or other establishment of the United States

authorized to issue Treasury checks or for which checks drawn on the

Treasury of the United States are issued.

(b) Bank means any financial institution, including but not limited

to, any savings bank, national bank, trust company, state bank, and

credit union created under Federal or state law.

(c) Benefit payment includes but is not limited to a payment of

money for any Federal Government entitlement program or annuity.

(d) Certifying agency means an agency authorizing the issuance of a

Treasury payment by a Treasury disbursing officer or a non-Treasury

disbursing officer in accordance with 31 U.S.C. 3325.

(e) Check means a draft or an order to pay drawn on the United

States Treasury.

(f) Check payment means the amount paid to a presenting bank by a

Federal Reserve Bank.

(g) Commissioner means the Commissioner of the Financial Management

Service, Department of the Treasury.

(h) Days means calendar days.

(i) Decline payment means the process whereby Treasury refuses to

make final payment on a check by instructing the Federal Reserve Bank

to reverse its provisional credit to a presenting bank.

(j) Federal Reserve Bank means a Federal Reserve Bank and its

branches.

(k) Financial institution means any bank, including but not limited

to, any savings bank, national bank, trust company, state bank and

credit union created under Federal or state law.

(l) First examination means Treasury's process of check

reconciliation which involves comparing disbursing officer issue

information on checks with Federal Reserve Bank payment information.

Where the issue information is at odds with the payment information,

first examination will include retrieval and inspection of the check,

or the best available image thereof.

(m) Material defect or alteration means

(1) The counterfeiting of a check; or

(2) Any physical change on a check, including, but not limited to,

the amount, date, payee name, or other identifying information printed

on either the front or the back of the check; or

(3) Any forged or unauthorized indorsement appearing on the back of

the check.

(n) Person or persons means an individual or individuals, or an

institution or institutions, including all forms of financial

institutions.

(o) Presenting bank means:

(1) A financial institution which, either directly or through a

correspondent banking relationship, presents checks to and receives

provisional credit from a Federal Reserve Bank; or

(2) A depositary, designated by statute, which is authorized to

charge checks directly to the Treasury General Account and present them

to Treasury for payment through a designated Federal Reserve Bank.

(p) Protest means a bank's written statement and any supporting

documentation tendered for the purpose of establishing that the bank is

not liable for refund of the reclamation balance.

(q) Reclamation means a demand by Treasury to a bank for refund of

the amount of a check payment.

(r) Reclamation date means the date on which Treasury prepares a

demand for refund. Normally, demands are sent to banks within 2 working

days of the reclamation date.

(s) Treasury means the United States Department of the Treasury.

(t) U.S. securities means securities of the United States and

securities of Federal agencies and wholly or partially Government-owned

corporations for which Treasury acts as the transfer agent.

(u) Unauthorized indorsement means:

(1) An indorsement made by a person other than the payee, except as

authorized by and in accordance with Sec. 240.5 and Secs. 240.11

through 240.15;

(2) An indorsement by a bank under circumstances in which the bank

breaches the guaranty of indorsement required of it by 31 CFR 209.9(a);

(3) A missing indorsement where the depositary bank had no

authority to supply the indorsement.

3. Section 240.3 is amended by revising paragraphs (c), (d) and (e)

to read as follows:

Sec. 240.3 Limitations on payment.

* * * * *

(c)(1) Treasury shall have the right as drawee to examine checks

presented for payment and reconcile or direct the Federal Reserve Bank

to refuse payment of any checks.

(2) Receipt of credit by a bank from a Federal Reserve Bank shall

be provisional until Treasury completes first examination of the check.

(3) When first examination by Treasury establishes that a check has

a material defect or alteration, Treasury will decline payment on the

check.

(d) Notwithstanding the provisions of paragraph (c) of this

section, when issue information is not available within 150 days after

the check is presented to the Federal Reserve Bank for payment, or when

first examination is otherwise not completed within such time frame,

Treasury will be deemed to have made final payment on the check.

(e) Notwithstanding the provisions of paragraph (d) of this

section, if Treasury is on notice of a question of law or fact about

whether a check is properly payable upon presentment for payment, and

Treasury refers such question to the Comptroller General under 31

U.S.C. 3328(a)(2), the Commissioner may defer final payment on the

check until the Comptroller General settles the question.

4. Section 240.4 is amended by redesignating paragraph (a)(3) as

paragraph (c) and revising it to read as set forth below; removing

paragraph (b) and redesignating paragraph (a)(2) as (b); and by

redesignating paragraph (a)(1) as (a) and revising it to read as

follows:

Sec. 240.4 Cancellation and distribution of proceeds of checks.

(a) Any check issued on or after October 1, 1989 that has not been

paid and remains outstanding for more than 12 months shall be cancelled

by the Commissioner.

(b) * * *

(c) On a monthly basis, the Commissioner shall provide to each

agency that authorizes the issuance of Treasury checks a list of those

checks issued for such agency which were cancelled during the preceding

month pursuant to paragraph (a) of this section.

5. Section 240.6 is amended by revising paragraph (a) to read as

follows:

[[Page 48942]]

Sec. 240.6 Reclamation of amounts of paid checks.

(a) If Treasury determines that a check has been paid over a forged

or unauthorized indorsement, or that a check containing a material

defect or alteration is deemed paid under Sec. 240.3, the presenting

bank or any other indorser shall be liable to the Treasury for the full

amount of the check payment. The Commissioner may reclaim the amount of

the check payment from the presenting bank, or from any other indorser

that breached its guaranty of indorsement prior to:

(1) The end of the 1-year period beginning on the date of

provisional payment; or

(2) The expiration of the 180-day period beginning on the close of

the period described in paragraph (a)(1) of this section if a timely

claim under 31 U.S.C. 3702 is presented to the certifying agency.

* * * * *

6. Section 240.9 is amended by revising paragraphs (a)(1) and

(a)(3) (ii) and (iv) to read as follows:

Sec. 240.9 Processing of checks.

(a) Federal Reserve Banks. (1) Federal Reserve Banks shall cash

checks for Government disbursing officers when such checks are drawn by

the disbursing officers to their own order. Payment of such checks

shall not be refused except for material defect or alteration of the

check.

(2) * * *

(3) * * *

(ii) Give immediate provisional credit therefor in accordance with

their current Time Schedules and charge the amount of the checks cashed

or otherwise received to the account of the Treasury, subject to first

examination and payment by Treasury.

(iii) * * *

(iv) Release the original checks to a designated Federal Records

Center upon notification from Treasury. Treasury shall return to the

forwarding Federal Reserve Bank a copy of any check the payment of

which is declined upon the completion of first examination, together

with notice of the declination. Federal Reserve Banks shall give

immediate credit therefor in Treasury's account, thereby reversing the

previous charge to the account for such check. Treasury authorizes each

Federal Reserve Bank to release a copy of the check to the indorser

when payment is declined.

* * * * *

7. Section 240.13 is amended by adding paragraph (c) to read as

follows:

Sec. 240.13 Checks issued to deceased payees.

* * * * *

(c) Deceased payee check intercepts.

(1) A benefit payment check, issued after a payee's death, is not

payable. When a certifying agency learns that a payee has died, the

certifying agency shall give immediate notice to Treasury. Upon receipt

of such notice, Treasury will instruct the Federal Reserve Bank to

refuse payment on the check upon presentment. The Federal Reserve Bank

will make every appropriate effort to intercept the check. Where a

check is successfully intercepted, the Federal Reserve bank will refuse

payment, and return the check unpaid to the bank with an annotation

that the payee is deceased. Where a financial institution learns that a

date of death triggering action under this section is erroneous, the

appropriate certifying agency which authorized the issuance of the

check should be contacted.

(2) Nothing in this section shall limit the right of Treasury to

institute reclamation proceedings under the provisions of Sec. 240.6

with respect to a deceased payee check paid over a forged or

unauthorized indorsement.

8. Section 240.16 is added to read as follows:

Sec. 240.16 Lack of authority to shift liability.

(a) This part neither authorizes nor directs a bank to debit the

account of any party or to deposit any funds from any account in a

suspense account or escrow account or the equivalent. However, nothing

in this part shall be construed to affect a bank's contract with its

depositor(s) under authority of State law.

(b) A bank's liability under this part is not affected by any

action taken by it to recover from any party the amount of the bank's

liability to the Treasury.

9. Section 240.17 is added to read as follows:

Sec. 240.17 Implementing instructions.

Procedural instructions implementing the regulations in this part

will be issued by the Commissioner of the Financial Management Service

in volume I, part 4 and volume II, part 4 of the Treasury Financial

Manual.

Dated: July 14, 1995.

Russell D. Morris,

Commissioner.

[FR Doc. 95-22647 Filed 9-20-95; 8:45 am]

BILLING CODE 4810-35-P