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FEDERAL RESERVE SYSTEM

12 CFR Part 229

[Regulation CC; Docket No. R-0926]

Availability of Funds and Collection of Checks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board is proposing amendments to its Regulation CC

relating to the availability of funds and collection of checks. The

proposed amendments do not represent any major policy changes and are

intended to clarify the regulation and, in some cases, reduce the

compliance burden for depository institutions.

DATES: Comments must be submitted on or before August 2, 1996.

ADDRESSES: Comments, which should refer to Docket No. R-0926, may be

mailed to Mr. William W. Wiles, Secretary, Board of Governors of the

Federal Reserve System, 20th Street and Constitution Avenue NW.,

Washington, D.C. 20551. Comments addressed to Mr. Wiles also may be

delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m. and

to the security control room outside of those hours. Both the mail room

and the security control room are accessible from the courtyard

entrance on 20th Street between Constitution Avenue and C Street NW.

Comments may be inspected in Room MP-500 between 9:00 a.m. and 5:00

p.m.

FOR FURTHER INFORMATION CONTACT: Louise Roseman, Associate Director

(202/452-2789), Division of Reserve Bank Operations and Payment

Systems; Stephanie Martin, Senior Attorney (202/452-3198), Heatherun

Allison, Attorney (202/452-3565), Legal Division; Manley Williams,

Staff Attorney, (202/736-5565), Division of Consumer and Community

Affairs. For the hearing impaired only, contact Dorothea Thompson,

Telecommunications Device for the Deaf (TDD) (202/452-3544), Board of

Governors of the Federal Reserve System, 20th and C Streets NW.,

Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION: The Board is proposing amendments to its

Regulation CC (12 CFR Part 229), Availability of Funds and Collection

of Checks. The proposed amendments are clarifying and technical in

nature and do not represent any major policy changes. The proposed

amendments to subpart B of the regulation, governing availability

schedules and disclosures, address a variety of issues, including the

treatment of deposits received at ``contractual'' branches (such as

affiliate banks). Many of the proposed amendments are designed to

reduce the burden on depository institutions of complying with the

regulation. For example, the proposed amendments would provide more

flexibility for banks giving hold notices under emergency conditions,

clarify the various media by which written notices may be given, and

delete certain notice content requirements. The Board is also proposing

to update the Model Forms in Appendix C.

The proposed amendments to subpart C, governing collection of

checks, would make various clarifications of the interaction between

Regulation CC and the Uniform Commercial Code (U.C.C.), set forth rules

for checks drawn on banks in Guam, American Samoa, and the Northern

Mariana Islands, and address other check collection matters. The Board

is specifically requesting comment on the time required for a bank to

qualify a returned check for automated processing (Sec. 229.31(a)), the

provisions regarding the extension of the midnight deadline

(Sec. 229.30(c)), and the extent of a presenting bank's preferred claim

against a closed paying bank (Sec. 229.39(d)).

A red-lined version of the proposed amendments to the regulation,

model forms, and Commentary is available from the Board's Freedom of

Information Office or by calling 202-452-3684.

Section-by-Section Analysis

Available for withdrawal (Sec. 229.2(d)). The regulation defines

``available for withdrawal'' to mean available for all uses generally

permitted to the customer for actually and finally collected funds

under the bank's account agreement or policies. The Commentary to this

definition clarifies that funds are considered available for withdrawal

even if they are being held to satisfy, among other things, the

customer's liability arising from the certification, guaranty, or

acceptance of a check or the sale of a cashier's or teller's check. The

Board has received several inquiries as to whether funds would be

considered available for withdrawal if they are being held to satisfy a

contingent obligation of the customer relating to the customer's

account. For example, a depositary bank might receive a notification

that the customer has authorized a debit to the account at a point-of-

sale terminal. Banks often ``memo-post'' these debits to the customer's

account in advance of the settlement date. The Board proposes to revise

the Commentary to clarify that funds held to meet contingent

obligations of the customer related to the account are considered to be

available for withdrawal.

Definition of ``bank'' (Sec. 229.2(e)). The regulation states that,

for purposes of subpart C, the term ``bank'' includes any person

engaged in the business of banking, including a Federal Reserve Bank, a

Federal Home Loan Bank, and a state or unit of general local government

to the extent that the state or unit of general local government acts

as a paying bank. The Board proposes to amend the regulation's

definition of ``bank'' to clarify that the Federal Reserve Banks, the

Federal Home Loan Banks, and state or units of general local government

are not necessarily engaged in the business of banking, notwithstanding

the fact that they are included in this definition.

Definition of ``traveler's check'' (Sec. 229.2(hh)). The Commentary

states that ``[t]raveler's checks that are not issued by banks may not

have any words on them identifying a bank as drawee or paying agent * *

*.'' Some commenters have interpreted this provision to mean that

traveler's checks are prohibited from having words on them identifying

a bank. The Board proposes to revise the Commentary to clarify that

only a description of a possible situation, and not a prohibition, is

intended.

Notice requirement to state amount of deposit (Secs. 229.13(g) and

229.16(c)). Regulation CC requires a notice of an exception hold

(Sec. 229.13(g)(1)(i)(B)) or a case-by-case hold

(Sec. 229.16(c)(2)(i)(B)) to include the amount of the deposit from

which funds will be held. Some banks have noted that when they learn

that a check is being returned by the paying

[[Page 27803]]

bank several days after the day of deposit, it is often difficult to

trace the check back to a particular deposit, especially in cases where

a corporate customer makes several multi-check deposits on a single

day. The Act does not require the notice to contain the amount of the

deposit. The Board is proposing to eliminate the ``amount of deposit''

requirement for both exception and case-by-case hold notices. The Board

also requests comment on the burdens to depositary banks and the

benefits to customers of the requirement for hold notices to include

the date of deposit.

Emergency exception notices (Secs. 229.13(g)). The regulation

allows a depositary bank to place an exception hold on funds deposited

by check in the case of an emergency, such as computer or

communications interruptions, suspension of payments by another bank,

or war. The regulation requires the depositary bank to provide a notice

to the customer of the emergency hold in the same manner in which it

provides notice under the other exception holds, except that no notice

is necessary if the funds are made available before the notice must be

sent. Some banks have argued that during a major disaster they would be

unable to meet the timing deadline for emergency exception hold

notices. (Under the current regulation, the bank would have to mail or

deliver the notice to the customer no later than the first business day

following the day the facts upon which a determination to invoke the

hold become known to the depositary bank.) The current deadline may be

impracticable due to the time required to move to a backup processing

site and the need for the bank to focus on other customer service

priorities in the event of major disasters.

Section 604(f)(2)(C) of the Act requires depositary banks to send

emergency exception hold notices ``in accordance with regulations of

the Board.'' Therefore, the Board has the authority to adopt a more

flexible provision regarding the timing of emergency hold notices.

Because of the difficulty of determining an appropriate time deadline

for notices in advance of any particular emergency, the Board is

proposing to amend Regulation CC to require a depositary bank to give

reasonable notice of emergency exception holds. Reasonable notice in

some situations might consist of individual notices mailed to customers

as soon as practicable or, in other situations, may consist of general

notices, such as postings at branches or ATMs, or newspaper,

television, or radio notices. The Board proposes to amend

Sec. 229.13(g) and revise the accompanying Commentary to provide

separate requirements for emergency condition exception notices.

Written notices (Secs. 229.13(g) and 229.15(a)). Section 229.13(g)

requires a depositary bank to provide written exception hold notices to

customers. Section 229.15(a) requires banks to make availability policy

disclosures in writing. Some banks have asked whether a notice sent

through electronic mail would be permissible. The Board is proposing to

revise the Commentary to both these sections to clarify that notices

delivered via fax or electronic media that display text on a monitor or

screen, such as electronic mail, screenphone, or interactive

television, are considered written notices.

Exception holds and the cash withdrawal rule (Sec. 229.13(h)).

Section 229.12(d) permits a depositary bank to extend holds on deposits

of local, nonlocal, and certain other checks by one business day for

purposes of withdrawals by cash or similar means, with the exception of

$400, which must be made available by 5:00 p.m. on the original

availability day (the ``cash withdrawal rule''). The purpose of the

cash withdrawal rule is to allow depositary banks an additional day to

learn if a check is being returned before allowing irrevocable

withdrawals from the customer's account. Some banks have asked how the

cash withdrawal rule works in conjunction with the exception holds. For

example, if a large deposit exception hold is placed on a $7,000 local

check, $100 must be made available on the next business day, an

additional $4,900 must be available by the second business day after

deposit for check-writing purposes and by the third business day after

deposit for withdrawal by cash or similar means. The banks asked

whether the five-day exception hold on the $2,000 remainder is added to

the second business day for all purposes, or whether the hold period

may be added to the second day for check-writing withdrawals and to the

third day for cash and similar withdrawals. The Board believes that it

is not necessary to extend the exception hold period for cash

withdrawal purposes, as in almost every case the depositary bank should

learn of a returned local check by the seventh business day after

deposit. Therefore, the Board is proposing to clarify that the

exception hold periods may be applied to the availability schedules for

local and nonlocal checks and checks deposited in a nonproprietary ATM,

but may not be extended under the cash withdrawal rule.

Disclosure of branch-specific policies (Sec. 229.16(a)). Section

229.16 requires banks to furnish notices of their specific availability

policies. Some banks have established different availability policies

at different branches (or for deposits accepted on behalf of the bank

by affiliates or ``contractual branches''). These banks have asked

about the disclosure implications of different policies and whether

such a bank must disclose to every customer what routing numbers are

local to each location where deposits are accepted. The Board is

proposing to revise the Commentary to Sec. 229.16(a) to clarify that a

bank may provide customers with a branch-specific disclosure. The Board

proposes that banks, when determining which disclosure to provide, be

allowed to allocate customers between branches through good faith use

of a reasonable method, such as where the customer opened the account.

This proposal is consistent with the disclosure requirement in the

Interagency Policy Statement on Branch Closings.1

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\1\ 58 FR 49083, September 21, 1993.

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Deposits at contractual branches (Secs. 229.2(s), 229.10(c),

229.14(a), 229.19(a)). Due to easing of interstate branching

restrictions, the practice of one bank accepting deposits on behalf of

another bank (``contractual branching'') is growing more prevalent. The

Board proposes to clarify the Commentary regarding treatment of

deposits at contractual branches. The proposed revision to the

Commentary to the definition of local paying bank (Sec. 229.2(s))

states that a branch of a bank that is acting as an agent of the

depositary bank is considered a branch of the depositary bank.

Therefore, a check would be deemed local or nonlocal based on the

location of the contractual branch with respect to the location of the

paying bank.

The Board also proposes to revise the Commentary to Secs. 229.10(c)

and 229.19(a) to clarify that deposits at contractual branches would be

treated similarly to deposits at proprietary ATMs; that is, deposits at

contractual branches would be considered deposited when the funds are

received by the contractual branch teller. However, deposits at

contractual branches would not be considered deposited at a teller

station staffed by an employee of the depositary bank within the

meaning of Sec. 229.10(c)(ii)-(v). The Board is also proposing to

revise the Commentary to Sec. 229.19(a) to state that the depositary

bank could set a noon cut-off hour for deposits at contractual

branches, as these deposits are treated as received at ``off-premise''

facilities. Finally, the Board proposes to revise the Commentary to

Sec. 229.14(a) to clarify

[[Page 27804]]

that, in the case of a deposit at a contractual branch, interest must

accrue when the account-holding bank receives credit for the deposit,

not when the contractual branch receives credit.

Holds on other funds--notices (Sec. 229.19(e)). Section 229.19(e)

provides that when a bank accepts a deposit to an account that is

subject to the Regulation CC availability requirements, the bank may

not place a hold on any other funds of the customer that exceeds those

requirements. Similarly, if a customer cashes a check over the counter

(other than an ``on-us'' check), Sec. 229.19(e) prohibits the bank from

placing a hold on a transaction account of that customer that exceeds

the Regulation CC schedules that would apply to that check. Section

229.19(e) does not explicitly address whether the depositary bank must

provide a hold notice (case-by-case or safeguard exception) in these

cases. The Board is proposing to revise the Commentary to 229.19(e) to

clarify that such a hold requires a notice if an exception or case-by-

case notice would have been required under 229.13 or 229.16 had the

funds been deposited in an account or had the hold been placed on those

funds.

Midnight deadline extension (Sec. 229.30(c)). The regulation

(Sec. 229.30(c)(1)) allows a bank to return a check after the midnight

deadline, in order to expedite delivery, as long as it uses a means of

delivery designed to get the returned check to the receiving bank by

the end of that receiving bank's next banking day, or later if ``highly

expeditious transportation'' is used. Section 229.30(c)(2) allows a

paying bank to extend a Saturday midnight deadline if the checks get to

a returning bank by the cut-off hour for the returning bank's next

processing cycle or to a depositary bank by the end of the depositary

bank's next banking day. The Board proposes to amend the regulation to

clarify that Sec. 229.30(c)(1) pertains to all midnight deadlines other

than Saturday midnight deadlines, and that Sec. 229.30(c)(2) pertains

only to extension of a Saturday midnight deadline.

The Board also requests comment on whether further modifications to

the regulation would be desirable in light of problems posed by

nonstandard banking days other than Saturdays, e.g., mid-week holidays.

For example, should the Sec. 229.30(c)(2) midnight deadline extension

apply in all instances when a bank is open on a non-business day, such

as a mid-week holiday? Do nonstandard banking days cause other problems

for banks in complying with the regulation?

In addition, some banks have asked whether the regulation's

conditions for extending a midnight deadline require a determination of

motive or whether the regulation simply sets forth a ``time-of-

receipt'' test. Specifically, questions have arisen concerning whether

Sec. 229.30(c) is available only ``in order to expedite delivery'' (and

not, for example, to avoid a kite) or whether extension of the midnight

deadline is permitted for any reason so long as the returned check is

received by the receiving bank by the end of that bank's next banking

day (or later if ``highly expeditious transportation'' is used). The

Board requests comment on the circumstances under which banks make use

of the extension of the midnight deadline and under which the extension

should be available.

Extra day to create qualified returned checks (Sec. 229.31(a)).

Section 229.31(a) allows a returning bank to convert a returned check

to a qualified returned check (i.e., to encode the returned check with

the routing number of the depositary bank, the amount of the check, and

a return identifier so that it can be handled in an automated manner).

If the returning bank creates a qualified returned check,

Sec. 229.31(a) provides a one-day extension in the returning bank's

time frame for meeting the ``forward-collection'' expeditious return

test in Sec. 229.31(a)(2) (but not the ``two-day/four-day'' test) and

the deadlines for return under Regulation J and the U.C.C. This

extension does not apply if the returning bank returns the check

directly to the depositary bank, because in that case the preparation

of the qualified returned check will not expedite handling by other

banks. Given the improvements in the check return system since

Regulation CC was first implemented, the Board believes that the one-

day extension is rarely used and is unnecessary. The Board proposes to

eliminate the extension and to amend Sec. 229.31(a) of the regulation

and revise the accompanying Commentary accordingly. The Board requests

comment on whether this extension is still necessary and, if so, a

description of the operational problems that elimination of the

extension would cause.

Midnight deadline warranty and U.C.C. defenses (Sec. 229.34(a)(1)).

Section 229.34(a)(1) requires a paying or returning bank that returns a

check to warrant that the return is within its deadlines under

Regulation CC, Regulation J, and the U.C.C. The Commentary to

Sec. 229.30(a) clarifies that a paying bank is not responsible for

failure to make expeditious return under that section to a party that

has breached a presentment warranty under U.C.C. 4-208. This Commentary

is consistent with U.C.C. 4-302(b), which subjects the paying bank's

liability for missing its midnight deadline to defenses based on a

breach of a presentment warranty or fraud. The Board proposes to revise

the Commentary to Sec. 229.34(a)(1) to clarify that a paying or

returning bank's warranty of timely return within the U.C.C. deadline

is subject to U.C.C. claims or defenses.

Set-off rights (Sec. 229.34(c)(4)) and returning bank liability

(Sec. 229.31(a)). Under Sec. 229.34(c)(4), if a paying bank overpays a

presenting bank for checks presented, the paying bank may set off the

excess amount paid against subsequent settlements for checks presented

by that bank. The Board proposes to amend that section (and revise the

accompanying Commentary) to give any bank in the collection or return

chain the right to offset excess settlement made to a particular bank

against settlement for subsequent checks or returned checks transferred

by that bank.

The Board also proposes to revise the Commentary to Sec. 229.31(a),

which discusses the returning bank's liability if it makes an encoding

error when creating a qualified returned check. The Commentary

currently points out that the returning bank could be liable under

Sec. 229.38 for losses caused by negligence. The Board proposes to add

that the returning bank could also be liable for a breach of its

encoding warranty under Sec. 229.34(c)(3).

Time limit for notice of warranty breach (Sec. 229.34(f)). Sections

4-207(d) and 4-208(e) of the U.C.C. provide that a claimant on a breach

of warranty must give notice to the warrantor within 30 days after the

claimant has reason to know of the breach and the identity of the

warrantor, or else the warrantor is discharged to the extent of any

loss caused by the delay in notice. The Board proposes to add this time

limitation for notices of warranty claims to Regulation CC. The Board's

proposal would ensure that the same time limitations apply for check-

related warranty claims, regardless of whether the claim is under state

or federal law.

Electronic presentment (Sec. 229.36(c)). Section 229.36(c) allows a

bank to present a check electronically under an agreement with the

paying bank. That section and the accompanying Commentary contain

references to check ``truncation'' (generally a term used to describe a

system in which the physical check is held at some point in the check

collection process). An electronic presentment arrangement may, but

does not necessarily, include truncation of

[[Page 27805]]

the physical check. Therefore, the Board proposes to amend

Sec. 229.36(c) and revise the accompanying Commentary to apply it to

``electronic presentment'' arrangements, not merely ``truncation''

arrangements. The Board also proposes to revise the Commentary by

adding an example of an electronic presentment arrangement.

Labelling requirements for payable-through checks (Sec. 229.36(e)).

A bank that arranges for a check drawn on it to be payable through

another bank must ensure that certain information is printed on the

face of the check. Specifically, Sec. 229.36(e) requires that these

checks show (1) the name, location, and first four digits of the

routing number of the bank by which the check is payable, and (2) the

words ``payable through'' followed by the name and location of the

payable-through bank. The Board adopted these labelling requirements to

enable banks and their customers to identify payable-through checks and

to determine whether they are local or nonlocal. The provisions

regarding the ``payable through'' designation and the name and location

of the payable-through bank are similar to provisions in U.C.C. 4-106.

As these particular labelling requirements are covered by state law,

the federal regulatory provision appears to be unnecessary, and the

Board is proposing to eliminate it from Regulation CC. The Board would

retain the labelling requirements regarding the name, location, and

first four digits of the routing number of the bank by which the check

is payable.

Measure of damages (Sec. 229.38(a)). The Commentary states that the

measure of damages provided in Sec. 229.38(a) ``derives from U.C.C. 4-

103(e) and 4-202(c).'' The Board proposes to revise the Commentary to

clarify the effect of U.C.C. 4-202(c) upon the measure of damages, as

U.C.C. 4-202(c) does not state a measure of damages but rather limits

liability by providing that a bank that has exercised ordinary care is

not liable for the insolvency, neglect, misconduct, mistake, or default

of others, or for the loss or destruction of an item by others.

Correction to Commentary (Sec. 229.38(d)). In the 1995 technical

amendments to Regulation CC (60 FR 51669, October 3, 1995), some words

were inadvertently dropped from the Commentary to Sec. 229.38(d). The

Board is proposing to correct the Commentary.

Preferred claim against depositary bank (Sec. 229.39(b)). Section

229.39(b) gives a bank a preferred claim against a closed paying or

depositary bank that ``finally pays'' a check or returned check without

settling for it. A paying bank ``finally pays'' (becomes accountable

for) a check if it doesn't settle for or return the check by the

applicable deadline. A depositary bank is obligated to ``pay'' for a

returned check under Sec. 229.32(b) but may not return the returned

check. The depositary bank can meet its obligations under

Sec. 229.32(b) only by settling for the returned check. Therefore, the

depositary bank cannot ``finally pay'' for a returned check without

settling for it. The Board proposes to amend Sec. 229.39(b) and revise

the accompanying Commentary to clarify this distinction. The substance

of Sec. 229.39(b) would not change.

Preference against presenting bank (Sec. 229.39(d)). Section

229.39(d) gives a paying bank a preferred claim against a closed

presenting bank in the event that the presenting bank breaches an

amount or encoding warranty as provided in Sec. 229.34(c) (1) or (3)

and does not reimburse the paying bank for adjustments for a settlement

made by the paying bank in excess of the value of the checks presented.

This preference is intended to have the effect of a perfected security

interest and is intended to put the paying bank in the position of a

secured creditor for purposes of the receivership provisions of the

Federal Deposit Insurance Act and similar provisions of state law.

The Board added Sec. 229.39(d) in 1992, as part of the ``same-day

settlement'' amendments to Regulation CC (57 FR 46956, October 14,

1992). At that time, some cementers suggested that the preferred claim

should extend to claims other than adjustments, such as breach of a

U.C.C. presentment warranty (e.g., warranties against forged or missing

indorsements and alterations). At that time, the Board noted that a

preferred claim against a failed presenting bank for forgeries, missing

indorsements, and alterations may reduce risk to the paying bank. That

risk, however, was not directly related to the obligation to make same-

day settlement and was not addressed in the original proposal,

therefore the Board did not adopt the cementers' suggestion. The Board

is now requesting comment on whether Sec. 229.39(d) should be expanded

to cover the U.C.C. presentment warranties.

Exclusions (Sec. 229.42). The regulation exempts certain checks

from the expeditious return and notice of nonpayment requirements

(e.g., a check drawn upon the United States Treasury, a U.S. Postal

Service money order, or a check drawn on a state or a unit of general

local government that is not payable through or at a bank). The Board

proposes to amend the regulation to reflect that such checks are also

exempt from the same-day settlement requirements of Sec. 229.36(f).

Checks payable in Guam, American Samoa, and the Northern Mariana

Islands (Sec. 229.43). The Board has received inquiries as to the

applicability of Regulation CC to checks drawn on depository

institutions located in Guam, American Samoa, and the Northern Mariana

Islands (``Pacific island banks''). For purposes of the Board's

Regulation J, which governs collection of checks through Federal

Reserve Banks, Pacific island banks are deemed to be in the Twelfth

Federal Reserve District. Some checks drawn on these institutions

(``Pacific island checks'') bear U.S. routing numbers and are generally

handled by banks in the U.S. in the same manner as other checks.

Because the Act does not include Guam, American Samoa, or the

Northern Mariana Islands in the definition of ``United States,''

Pacific island banks are not ``banks'' and Pacific island checks are

not ``checks'' as defined in Regulation CC. Banks often handle Pacific

island checks in the same manner as other checks, however. The Board

believes that applying some of the provisions of subpart C to Pacific

island checks would provide an appropriate legal framework for the

handling of these checks. The Board proposes to add a new Sec. 229.43

to the regulation and accompanying Commentary to set forth the

provisions of subpart C that apply to checks drawn on Pacific island

banks.

The Board is proposing that the regulation specifically allow banks

to handle Pacific island checks for direct return and to convert them

to qualified returned checks. Because the subpart B availability

schedules do not apply to Pacific island checks, the Board is not

proposing to subject returning banks to the expeditious return

requirements of Sec. 229.31, even though, as a practical matter, the

Board believes that in most cases, banks will handle returned Pacific

island checks expeditiously. The Board requests comment on whether the

liability for failure to comply with expeditious return rules should

apply for Pacific island checks. In addition, the Board is proposing

that depositary banks that receive notice of nonpayment on Pacific

island checks are not subject to the provisions of Sec. 229.33(d)

requiring timely notice to the depositary bank's customer. Again, the

Board believes that in practice, most depositary banks would give

notice to their customer within the time frame required by

Sec. 229.33(d) and requests comment on whether that section should

apply to depositary banks with regard to Pacific island checks.

[[Page 27806]]

The only Regulation CC warranties that would apply to banks

handling Pacific island checks for forward collection or return are the

cash letter total and encoding warranties in Sec. 229.34(c)(2) and (3).

In addition, the Board would apply relevant provisions of Secs. 229.35-

229.42 to banks that handle Pacific island checks.

Model Forms (Appendix C). The Board proposes to make technical and

stylistic changes to facilitate use of the model forms. For example,

the Board would revise the typefaces. Information that a bank must

insert, such as the bank's cut-off hour, would be italicized in

parentheses. Where a provision is required only if a bank has elected

to take advantage of a particular section of the regulation (requiring

the use of a special deposit slip to receive next-day availability for

a teller's check, for example) the provision would be enclosed in

brackets and the additional disclosure requirements (how to obtain a

special deposit slip, for example) would be italicized within

parentheses in the brackets. Banks that use earlier versions of the

model forms would be protected from civil liability under

Sec. 229.21(e), but would be encouraged to use new versions when

reordering or reprinting supplies. The Board requests comment on

whether any models in addition to those currently in Appendix C would

be helpful to banks.

The Board proposes the following additional changes to the models:

Model C-3 Next-day availability, case-by-case holds to statutory

limits, and Sec. 229.13 exceptions. The Board proposes to revise Model

C-3, to clarify the availability of funds subject to a hold. Generally,

the first $100 is available on the first business day after deposit.

The first $100 may not be available, however, if the funds are subject

to an exception hold under Sec. 229.13.

Model C-5 Holds to statutory limits on all deposits. The Board

proposes to revise Model C-5 to facilitate use of the form by banks

that elect to impose the limitation on withdrawals by cash under

Sec. 229.12(d).

Model C-10 Cash withdrawal limitation. The Board proposes to

revise Model C-10 to facilitate the incorporation of the clause into

the various model availability policy disclosures.

Model C-12 Exception hold notice. The Board proposes to revise

Model C-12 to clarify that the optional provision concerning overdraft

or returned check fees applies only to the last category of reasons,

reasonable cause to doubt collectibility. In addition, to reflect the

proposed change to Sec. 229.13(g)(1)(i)(B), the Board would delete the

reference to the amount of the deposit.

Model C-13 Reasonable cause hold notice. To reflect the proposed

change to Sec. 229.13(g)(1)(i)(B), the Board proposes to delete the

reference to the amount of the deposit.

Model C-16 Case-by-case hold notice. The Board proposes to revise

the model notice to incorporate optional language for banks that elect

to impose the cash withdrawal limitation. In addition, to reflect the

proposed change to Sec. 229.16(c)(2)(i)(B), the Board would delete the

reference to the amount of the deposit.

Commentary to model forms. The Board proposes to make a number of

technical and stylistic changes to the Commentary to the model

disclosures, clauses, and notices. For example, the proposed Commentary

clarifies that the Act's protection from liability for banks that use

the models properly applies to the model clauses and notices as well as

to the model disclosures. In addition, the proposed Commentary to

Models C-2 through C-5 clarifies that in disclosing that a longer delay

may apply, a bank may disclose when funds will be generally available

based on when the funds would be available if the deposit were of a

nonlocal check. The proposed Commentary to model notices C-12 through

C-16 clarifies that a bank should modify the notices if it places a

hold on other funds.

Initial Regulatory Flexibility Analysis

The Regulatory Flexibility Act (5 U.S.C. 601-612) requires an

agency to publish an initial regulatory flexibility analysis with any

notice of proposed rulemaking. Two of the requirements of an initial

regulatory flexibility analysis (5 U.S.C. 603(b)), a description of the

reasons why action by the agency is being considered and a statement of

the objectives of, and legal basis for, the proposed rule, are

contained in the supplementary material above. The proposed rules

require no additional reporting or recordkeeping requirements and do

not overlap with other federal rules.

Another requirement for the initial regulatory flexibility analysis

is a description of and, where feasible, an estimate of the number of

small entities to which the proposed rule will apply. The proposal will

apply to all depository institutions regardless of size. The proposed

amendments generally clarify rights and duties of depository

institutions and do not impose any substantial economic burden on small

entities.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

Ch. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the proposed

rulemaking under the authority delegated to the Board by the Office of

Management and Budget. Comments on the collections of information

should be sent to the Office of Management and Budget, Paperwork

Reduction Project (7100-0235), Washington, DC 20503, with copies of

such comments to be sent to Mary M. McLaughlin, Federal Reserve Board

Clearance Officer, Division of Research and Statistics, Mail Stop 97,

Board of Governors of the Federal Reserve System, Washington, DC 20551.

The collection of information requirements in this proposed

rulemaking are found in 12 CFR 229.13, 229.15(a), 229.16(a), 229.16(c),

229.19(e), 229.34(f), former 229.36(e), and Appendix C. This

information is intended to alert consumers about their financial

institutions' check-hold policies and to help prevent unintentional

(and costly) overdrafts. The respondents are for-profit financial

institutions, including small businesses. The Board's Regulation CC

applies to all types of depository institutions, not just state member

banks. However, under Paperwork Reduction Act regulations, the Federal

Reserve accounts for the burden of the paperwork associated with the

regulation only for state member banks. Any estimates of paperwork

burden for institutions other than state member banks that would be

affected by the proposed amendments would be provided by the federal

agency or agencies that supervise those lenders.

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. The OMB control number

is 7100-0235.

The proposed amendments are not expected to change the ongoing

annual burden. The estimated burden per response ranges from 3 minutes

(for a notice of exception, a case-by-case hold notice, or a notice to

a potential new customer or to any person upon request) to 20 hours for

notices of changes in policy. There are 1,042 state member banks and an

average frequency of 3,314 responses per respondent each year. The

total amount of annual burden is estimated to be 183,711 hours. Based

on an hourly cost of $20, the annual cost to the public is estimated to

be $3,674,220. There is not estimated to be any annual cost burden over

the annual

[[Page 27807]]

hour burden. Additionally, the Federal Reserve estimates that there is

associated capital or start up cost in the amount of $80 per bank for

revising the notices to conform with the new model availability policy

disclosures, clauses, and notices when a bank exhausts its current

supply.

Because the notices are not provided to the Federal Reserve, no

issue of confidentiality under the Freedom of Information Act arises.

The disclosure of information to consumers with regard to the

availability of funds is available to the public. The account

information regarding the availability of funds in an individual's

account is confidential between the institution and the consumer.

Comments are invited on: (a) whether the proposed revised

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 revised 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.

List of Subjects in 12 CFR Part 229

Banks, Banking, Federal Reserve System, Reporting and recordkeeping

requirements.

For the reasons set forth in the preamble, 12 CFR Part 229 is

proposed to be amended as set forth below:

PART 229--AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS

(REGULATION CC)

1. The authority citation for part 229 continues to read as

follows:

Authority: 12 U.S.C. 4001 et seq.

2. In Sec. 229.2, the first sentence in paragraph (e) concluding

text is revised to read as follows:

Sec. 229.2 Definitions.

* * * * *

(e) * * *

For purposes of subpart C of this part and, in connection therewith,

this subpart A, the term bank also includes any person engaged in the

business of banking, as well as a Federal Reserve Bank, a Federal Home

Loan Bank, and a state or unit of general local government to the

extent that the state or unit of general local government acts as a

paying bank. * * *

* * * * *

3. Section 229.13 is amended as follows:

a. In paragraphs (g)(1) introductory text and (g)(1)(ii)(A), the

phrase ``paragraphs (b) through (f)'' is revised to read ``paragraphs

(b) through (e)'';

b. Paragraphs (g)(1)(i)(B) and (g)(1)(i)(E) are revised;

c. Paragraph (g)(1)(ii)(B) is removed and the paragraph designation

(g)(1)(ii)(A) is removed;

d. Paragraph (g)(4) is redesignated as paragraph (g)(5) and new

paragraph (g)(4) is added; and

e. Paragraph (h) is revised.

The addition and revisions read as follows:

Sec. 229.13 Exceptions.

* * * * *

(g) Notice of exception--(1) * * *

(i) * * *

(B) The date of the deposit;

* * * * *

(E) The time period within which the funds will be available for

withdrawal.

* * * * *

(4) Emergency conditions exception notice. When a depositary bank

extends the time when funds will be available for withdrawal based on

the application of the emergency conditions exception contained in

paragraph (f) of this section, it must provide the depositor with

notice in a reasonable form and within a reasonable time given the

circumstances. The notice shall include the reason the exception was

invoked and the time period within which funds shall be made available

for withdrawal, unless the depositary bank, in good faith, does not

know at the time the notice is given the duration of the emergency and,

consequently, when the funds must be made available. The depositary

bank is not required to provide a notice if the funds subject to the

exception become available before the notice must be sent.

* * * * *

(h) Availability of deposits subject to exceptions. (1) If an

exception contained in paragraphs (b) through (f) of this section

applies, the depositary bank may extend the time periods established

under Secs. 229.10(c) and 229.12 (b), (c), (e), and (f) by a reasonable

period of time.

(2) If a depositary bank invokes an exception contained in

paragraphs (b) through (e) of this section with respect to a check

described in Sec. 229.10(c)(1) (i) through (v) or Sec. 229.10(c)(2), it

shall make the funds available for withdrawal not later than a

reasonable period after the day the funds would have been required to

be made available had the check been subject to Sec. 229.12 (b), (c),

(e), or (f).

(3) If a depositary bank invokes an exception under paragraph (f)

of this section based on an emergency condition, the depositary bank

shall make the funds available for withdrawal not later than a

reasonable period after the emergency has ceased or the period

established in Secs. 229.10(c) and 229.12 (b), (c), (e), or (f),

whichever is later.

(4) For the purposes of this section, a ``reasonable period'' is an

extension of up to one business day for checks described in

Sec. 229.10(c)(1)(vi), five business days for checks described in

Sec. 229.12(b)(1) through (4), and six business days for checks

described in Sec. 229.12(c)(1) and (2) or for checks deposited in a

nonproprietary ATM. A longer extension may be reasonable, but the bank

has the burden of so establishing.

4. Section Sec. 229.16(c)(2)(i)(B) is revised to read as follows:

Sec. 229.16 Specific availability policy disclosure.

* * * * *

(2) * * * (i) * * *

(B) The date of the deposit;

* * * * *

5. In Sec. 229.30, paragraph (c) is revised to read as follows:

Sec. 229.30 Paying bank's responsibility for return of checks.

* * * * *

nonpayment under the U.C.C. or Regulation J (12 CFR part 210), or

section 229.36(f)(2) is extended to the time of dispatch of such return

or notice of nonpayment where a paying bank, in an effort to expedite

delivery of a returned check to a bank, uses a means of delivery that

would ordinarily result in receipt by the bank to which it is sent--

(1) On or before the receiving bank's next banking day 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 banking day; or

(2) Prior to the cut-off hour for the next processing cycle (if

sent to a returning bank), or on the next banking day (if sent to the

depositary bank), for

[[Page 27808]]

a deadline falling on a Saturday that is a banking day (as defined in

the applicable U.C.C.) for the paying bank.

* * * * *

6. In Sec. 229.31, the last two sentences of paragraph (a)

concluding text are removed.

7. In Sec. 229.34, the section heading and paragraph (c)(4) are

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

Sec. 229.34 Warranties.

* * * * *

(4) If a bank settles with another bank in amount exceeding the

total amount of the checks or returned checks received, the bank may

set off the excess settlement amount against subsequent settlements for

checks or returned checks it receives from the other bank.

* * * * *

(f) Notice of claim. Unless a claimant gives notice of a claim for

breach of warranty under this section to the bank that made the

warranty within 30 days after the claimant has reason to know of the

breach and the identity of the warranting bank, the warranting bank is

discharged to the extent of any loss caused by the delay in giving

notice of the claim.

8. In Sec. 229.36, the heading and the last sentence of paragraph

Sec. 229.36 Presentment and issuance of checks.

* * * * *

agreement may not extend return times or otherwise vary the

requirements of this part with respect to parties interested in the

check that are not party to the agreement.

* * * * *

(e) Issuance of payable-through checks. (1) A bank that arranges

for checks payable by it to be payable through another bank shall

require that the name, location, and first four digits of the nine-

digit routing number of the bank by which the check is payable be

printed conspicuously on the face of each check.

* * * * *

9. In Sec. 229.39, paragraphs (b) and (d) are revised to read as

follows:

Sec. 229.39 Insolvency of bank.

* * * * *

(b) Preference against paying or depositary bank. If a paying bank

finally pays a check, or if a depositary bank becomes obligated to pay

a returned check, and suspends payment without making a settlement for

the check or returned check with the prior bank that is or becomes

final, the prior bank has a preferred claim against the paying bank or

the depositary bank.

* * * * *

(d) Preference against presenting bank. If a paying bank settles

with a presenting bank for one or more checks, and if the presenting

bank breaches a warranty specified in Sec. 229.34(c)(1) or (3) or in

the U.C.C. with respect to those checks and suspends payments before

satisfying the paying bank's warranty claim, the paying bank has a

preferred claim against the presenting bank for the amount of the

warranty claim.

* * * * *

10. Section 229.42 is revised to read as follows:

Sec. 229.42 Exclusions.

The expeditious return (Secs. 229.30(a) and 229.31(a)), notice of

nonpayment (Sec. 229.33) and same-day settlement (Sec. 229.36(f))

requirements of this subpart do not apply to a check drawn upon the

United States Treasury, to a U.S. Postal Service money order, or to a

check drawn on a state or a unit of general local government that is

not payable through or at a bank.

11. A new Sec. 229.43 is added to read as follows:

Sec. 229.43 Checks payable in Guam, American Samoa, and the Northern

Mariana Islands.

(a) Definitions. For the purposes of this section--

(1) Pacific island bank means an office of an institution that

would be a bank as defined in Sec. 229.2(e) but for the fact that the

office is located in Guam, American Samoa, or the Northern Mariana

Islands;

(2) Pacific island check means a negotiable demand draft drawn on

or payable through or at a Pacific island bank, which is not a check as

defined in Sec. 229.2(k).

(3) The definitions in Sec. 229.2 apply to this section, unless

otherwise noted.

(b) Rules applicable to Pacific island checks. To the extent a bank

handles a Pacific island check as if it were a check defined in

Sec. 229.2(k), the bank is subject to the following sections of this

part as if the Pacific island check were a check defined in

Sec. 229.2(k):

(1) Sec. 229.31, except that the returning bank is not subject to

the requirement to return a Pacific island check in an expeditious

manner;

(2) Sec. 229.32;

(3) Sec. 229.34(c)(2), (c)(3), (d), and (e);

(4) Sec. 229.35; for purposes of Sec. 229.35(c), the Pacific island

bank is deemed to be a bank;

(5) Sec. 229.36(d);

(6) Sec. 229.37;

(7) Sec. 229.38(a) and (c) through (h);

(8) Sec. 229.39(a), (b), (c) and (e); and

(9) Secs. 229.40 through 229.42.

12. Appendix C to Part 229 is amended as follows:

a. The appendix heading is revised;

b. The introductory text is revised;

c. The heading above the contents listing for models C-1 through C-

5 is revised;

d. The heading immediately above model policy disclosure ``C-1--

Next-day availability'' is revised; and

d. Model Availability Policy Disclosures C-1 through C-5, Model

Clauses C-9 and C-10, and Model Notices C-12 through C-16 are revised.

The revisions read as follows:

Appendix C to Part 229--Model Availability Policy Disclosures, Clauses,

and Notices

This appendix contains model availability policy disclosures,

clauses, and notices to facilitate compliance with the disclosure

requirements of Regulation CC (12 CFR part 229). Although use of

these models is not required, banks using them properly to make

disclosures required by the Regulation CC are deemed to be in

compliance.

Model Availability Policy Disclosures

* * * * *

Model Availability Policy Disclosures

C-1--Next-day availability

YOUR ABILITY TO WITHDRAW FUNDS

Our policy is to make funds from your deposits available to you

on the first business day after the day we receive your deposit.

Electronic direct deposits will be available on the day we receive

the deposit. Once they are available, you can withdraw the funds in

cash and we will use the funds to pay checks that you have written.

For determining the availability of your deposits, every day is

a business day, except Saturdays, Sundays, and federal holidays. If

you make a deposit before (time of day) on a business day that we

are open, we will consider that day to be the day of your deposit.

However, if you make a deposit after (time of day) or on a day we

are not open, we will consider that the deposit was made on the next

business day we are open.

C-2--Next-day availability and Sec. 229.13 exceptions