NCP 2015 Exam Cycle
Core Training Series
Session 6
National Check Payments Certification
Image Exchange: Rules and Agreements – Part II
Copyright© 2014 by the Electronic Check Clearing House Organization
NOTICES
This training course may provide an introduction to or summary of various aspects of check
payments and the legal and rules framework for check image exchange. Responsibility for
compliance with image exchange rules, and/or the legal, operational and regulatory
requirements applicable to check image exchange, remains at all times with the financial
institution participating in check image exchange and/or the individual or company using a
check image exchange service.
This presentation and the information contained herein is not intended as legal or compliance
advice or recommendation to any person or company. This document could include technical
inaccuracies or typographical errors and individual users are responsible for verifying any
information found in this presentation and related “live” webinar or webinar playback.
Financial institutions should consult with their legal counsel regarding legal and operational
requirements applicable to any check image exchange program they may offer or in which they
participate.
These program training materials may not be reproduced or published, in whole or in part,
without the express permission of ECCHO.
Copyright© 2014 by the Electronic Check Clearing House Organization
(Certain contributed content subject to third party copyrights)
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Session Overview
• Rules and Agreements
• Federal Reserve Operating Circular 3 (OC3)
and Reg J
• ECCHO/Fed Rules Comparison
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Rules and Agreements
Need for Rules
• Regulations vs. Rules
– UCC and Reg CC provide statutory and regulatory
definitions for paper checks
No default definition of image in current check law
– Where is the image of a check defined?
• Image Exchange by Agreement
– No laws cover exchange of check images
– Need agreements for exchanges through:
Federal Reserve or
Private sector
• Session will review provisions of Fed’s Operating
Circular 3 (OC 3) and warranties provided through
Reg J
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Operating Circular 3 (OC 3)
• Applies to handling of all cash items Fed:
– Accepts for forward collection; and
– Accepts for return
• Circular includes instructions to banks for
handling and paying items received from Fed:
– Paying banks
– Collecting banks
– Returning banks
– Depositary banks
• Also covers related services provided by Fed
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Regulation J
• Reg J provides legal framework for FIs to clear
checks via the Federal Reserve System
– Regulation specifies terms/conditions under which
FRBs:
Receive items for collection from banks; and
Present items to banks
– Establishes rules under which FIs may return
checks through the Fed
• Includes forward and return warranties
– For electronic items sent through Fed
Referenced by Fed’s Operating Circular 3 (OC3)
• Works in conjunction with Reg CC
– Discussed in prior session
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Related Services – Agreements
• Participant banks must execute agreement for
various image-enabled services:
– FedForward® Services
Deposit image cash letters of forward collection items
o FRBs will clear and present as either substitute checks or an
electronic file to paying bank
– FedReturn® Services
Deposit mixed image cash letters of return items
– FedReceipt Plus and FedReceipt Plus for Returns
Services
“Straight-through" electronic check processing for
portion or all of inclearings or outbound returns
– Check Adjustments Services
Resolution of debit/credit settlement discrepancies on
checks processed or handled by Federal Reserve
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Federal Reserve – OC 3 and Reg J
General Provisions
• Monitoring Account – Forward and Return
– Depositary, Collecting or Paying Bank
responsible to monitor Fed account to ensure
receipt of forward presentment items and
returns
• Cutoff Hour Return Deadline
– For purposes of return forward items received
after 2:00 p.m. local time considered received
next banking day
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Definitions
• Cash item
– Check other than one classified as a noncash item
– Any other item payable on demand and collectible at
Reserve Bank that receives the item and is willing to
accept as a cash item
• Check
– Draft, as defined in the Uniform Commercial Code, that
is drawn on a bank and payable on demand
• Item
– An instrument or a promise or order to pay money,
whether negotiable or not, that is payable in a Federal
Reserve District and collectible in funds acceptable to
the Fed
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Definitions
• Electronic item
– Must include an electronic image of check and
information describing that check
Must conform to Federal Reserve technical
requirements for processing electronic items
– Must be captured from a check
• May choose not to handle item if:
– Judges it should not be handled as cash item
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Warranties and Indemnity
• Operating circular references Reg J for check
exchange warranties
• Sender warrants and indemnifies Reserve
Bank
– Against loss, claim, or damage that results in
the handling of these items
FRBs are liable for own negligence and actions that
are not “in good faith”
– See Reg J warranty and indemnity summary in
PREP Guide
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Electronic Access
• Use of electronic connection
– Bank agrees to terms established in OC5
– Not every electronic access supports every feature
May need more than one electronic access
– Bank is a “Participating Bank”
• Participating Bank must:
– Establish bank's systems functionally compatible with Reserve Bank
Ensure capability to process volumes
– Meeting conditions requires
Identify Reserve Bank office where items will be sent
Specify maximum volume
• Bank must execute agreement with Fed and meet conditions of
Fed
– Bank has continuing obligation that systems are compatible
– Need prior consent to exceed daily maximum
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Electronic Services
• Disruptions in Electronic Services
– Problems may disrupt electronic access to services
– If unable to provide service Fed/Bank to notify Bank/Fed
May elect to use physical form
– Bank must be prepared to meet its legal obligations when
electronic access not available
– Information is deemed to be sent/received at physical
location identified by the RT
Time is deemed local time of location
– Fed and Bank may exchange items in paper form
• May select agent to act on their behalf to:
– Access Fed system to process checks, send/receive cash
letters and return cash letters
– Bank warrants that information is substantially accurate
– Bank is responsible for security and controls
Settle based on exchanges of agent
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Transmission
• Delivery and Receipt for All Forward/Return
– Delivered by Fed/Bank and received by Bank/Fed when
placed on Fed storage device that makes file available
to retrieve or review
Fed may also transmit to Bank
• Bank must manage its electronic connection
– If fails to manage, Fed may limit attempts to send
In such a case, Fed is deemed to have sent information
when it attempts to transmit the information
• For purposes of knowing when an item, notice,
message, acknowledgement, or information file
delivered / received, Fed records are determinative
• By use of electronic connection Bank agrees that
connection is reasonable means of communication
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Retention
• FRB retains cash letter no longer than two
days
– Bank bears responsibility to retrieve its files in
timely manner
• Fed not obligated to retain or make copies
of electronic items
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Cash Letter Processes
• Cash Letter Prep
– Items may be listed by amount without further
description
– Cash letters dated and identified by sender’s name
/routing number
– Accept following items forward/return only in special
cash letters
Noncash items
Carrier documents
Food coupons
Foreign items
Photo-in-Lieu (PIL)
– May require forward/return cash letter be segregated
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Cash Letter Processes
• Image and Return Cash Letters
– Sender provides file conforming to standards
Conform to DSTU X9.37 and FRB user document
– Files must be transmitted by means of electronic
connection
– Entire file must be received prior to processing deadline
Must successfully pass Reserve Bank edits
– Not responsible for delays in handling or lost files
Liable for loss within own shop that causes delay
Liable for delays created by own negligence
– Reserve Bank will send acknowledgment to sender
Receipt acknowledgement (positive) or
Non-receipt(negative)
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Indorsements
• All cash items and return checks sent must
be indorsed according to Reg CC
– Items received without senders indorsement,
FRB may choose to:
Present the item as if it was indorsed
Add the indorsement
Return item
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Availability of Credit
• Federal Reserve accepts items, forward and return, in
accordance with published schedules and procedures
– Provides credit in accordance with published circulars
• Items defined and handled as “Cash Items” (Check,
substitute check, electronic items as defined in circular,
government check, postal money orders, savings bonds,
foreign items)
– Appendix A: Government Checks
– Appendix B: Postal Money Orders
– Appendix C: Redeemed Savings Bonds / Savings Notes
– Appendix D: Foreign Cash Items
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Presentment
• Federal Reserve Bank may physically present items
at any location as defined in Reg CC
– Paying bank is considered to receive a cash item when
delivered as requested or when made available for
pickup as arranged
• Reserve Bank may present an electronic item to
Paying bank by transmitting or delivering an image
cash letter containing the electronic item
• Presentment occurs when the image cash letter is:
– Transmitted to the paying bank, or
– Written on the Reserve Bank’s data storage device
Must be in a form that is available for retrieval by the
paying bank
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Notification
• For Forward Presentment and Return:
– Federal Reserve Bank has no responsibility for
giving notice to a sender of anticipated delays
in presentment or return of cash items unless:
Delay is expected to involve at least ten paying
banks and
Lasts at least three business days
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Returned Checks
• Paying bank may return through Fed if it
meets deadlines
– May send to Fed items not handled in forward
–No commingling with forward cash letters
• Bank sending returned check warrants
return is within legal timeframes and
indemnifies Fed from any loss
• Fed does not agree to handle item more
expeditiously than required by Reg CC
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Returned Checks
• If Bank unable to identify depositary bank on
check received from Fed
• Bank may send back to Fed
• Fed may rely on amount and depositary bank
in appropriate field
• May return item to depositary bank or prior
collecting bank by returning electronic image
and data
– Return occurs when image return is written on
data storage device
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Returned Checks
• Fed may resend file two days after original file sent
•
•
•
•
– Based upon request
– Bank indemnifies Fed for any loss
Return conforms to Fed’s technical or operational
requirements
Bank must settle for returns as it does cash items
If return misrouted, encouraged to send promptly
to identified depositary bank
– If unidentified, bank sends NOI (Not Our Item) to Fed
Fed does not handle as a cash item an item that
has been declined for payment two or more times
– Only allows two total presentments
One re-presentment only
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Other Provisions
• Notice of Non-Payment Service
– Paying Bank may request this service
Fedline for the Web
Fedline Advantage
– Competing service to EARNS notification
system
• OC3 also includes:
– Adjustments
– Appendices for specialized products and
services offered by Federal Reserve Banks
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ECCHO / FED Rules Comparison
ECCHO and Fed Rules
Federal Reserve
– Creates its own image
exchange rules (OC3)
– Fed does not incorporate
the ECCHO rules into its
Operating Circulars
– Reserve Bank is itself a
party to exchange of check
images
ECCHO
– Creates and maintains rules for
private sector image exchange
– Rules apply only to exchanges
among its members or
licensing organization
– Members (not ECCHO), are
parties to the check image
exchanges
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ECCHO and Fed Rules
Federal Reserve
ECCHO
– FRBs support specific
set of check image
exchange products
– ECCHO rules are neutral
on vendors and products
Check 21 products for both
receive and send processing
• FedForward®
• FedReceipt®
• FedReturn®
• Other Image Services
National rules set accommodates
all types of check image
exchange models such as direct
exchanges, Image Archive, etc.
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ECCHO and Fed Rules
Federal Reserve
ECCHO
Presentment is based on
what is “sent”
Presentment is based on
what is “received
– Presentment occurs when
– Presentment occurs when the
electronic data and the image
are received or made available
to the Paying Bank
the electronic data is sent
or made available to the
Paying Bank
Items considered “presented”
when placed on FRB storage
device for Paying Bank to pick
up or when transmitted to the
Paying Bank
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Presentment under ECCHO rules
occurs when the file is received or
made available
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ECCHO and Fed Rules
Federal Reserve
ECCHO
Indemnities from Sending
Bank
Indemnities from Sending
Bank
– When FRB sends items to
Paying Bank, no
indemnity is provided
other than Check 21related indemnity
– ECCHO rules provide full
indemnity for breach of image
rules warranties
Remotely Created Checks
(RCC) Claims
– Handled only through
adjustment process
– Only for items sent
forward through the Fed
Remotely Created Checks
(RCC) Claims
– Handled as either return or
through adjustment process
– Can be item sent through Fed
or ECCHO forward exchange
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ECCHO and Fed Rules
Federal Reserve
– Fed requires Full MICR
line for item to be
eligible to exchange
• Required to create
substitute check
– Adjustments
• Item to be adjusted
must have been
exchanged through
FRB
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ECCHO
– Default is FULL MICR
• Allow Partial MICR by
agreement
• Rules further define
As-Read MICR or RNA
– Adjustments
• Rules allow items to be
adjusted between
members that may/may
not have been
exchanged under
ECCHO rules
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Questions
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Recommended Resources
• Federal Reserve website:
– www.frbservices.org/regulations/operating_circulars.html
• Regulation CC (12 CFR – Part 229):www.ecfr.gov
• Regulation J (12 CFR – Part 210): www.ecfr.gov
• ECCHO website: www.eccho.org/rules
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Ellen Heffner, NCP
Director and Education Manager
eheffner@eccho.org
214-273-3211
Image Exchange: Rules and Agreements – Part II
Thank You!
Electronic Check Clearing House Organization
3710 Rawlins Street; Suite 1075
Dallas, Texas 75219
NOTICE
This NCPC Program document contains copyrighted materials of its publisher.
These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO.