NCP’s Questions of the day
1/6/14
Question:
What is the purpose of Reg CC?
Answer:
Reg CC section § 229.1 states it’s authority and purpose as follows:
(a) Authority and purpose. This part is issued by the Board of Governors of the Federal Reserve System (Board)
to implement the Expedited Funds Availability Act (12 U.S.C. 4001–4010) (the EFA Act) and the Check
Clearing for the 21st Century Act (12 U.S.C. 5001–5018) (the Check 21 Act).
1/7/14
Question:
What did the Check 21 Act do?
Answer:
H.R. 1474, more commonly referred to as the Check 21 Act or Check 21, was intended to:
 Facilitate check truncation by authorizing substitute checks
 Foster innovation in the check collection system without mandating receipt of checks in electronic form
 Improve the overall efficiency of the Nation’s payments system
Mandated that all banks must accept substitute paper checks
Established that Check 21 supersedes any provision of State or Federal law, including the UCC, that is
inconsistent with the Act, such as requiring the return of original checks to consumers in periodic account
statements
Created a new negotiable instrument, a “substitute check”, a paper reproduction of the original check that  Accurately represents all of the information on the front and back of the original item including the
MICR line,
 Conforms to industry standards for substitute checks (ANS X9.100-140), and
 Must bear the legend: “This is a legal copy of your check. You can use it the same way you would use
the original check.”
Provided warranty criteria for substitute checks:
 Meets the legal equivalence requirements
 Not a duplicate of another paid item
Provided indemnity criteria for substitute checks:
 Reconverting bank, and any subsequent banks handling a substitute check, indemnify for any losses
incurred due to the receipt of a substitute check instead of the original
Established provisions for expedited recredit:
 A substitute check was incorrectly charged to the account or there is a warranty breach from the
substitute check
 The customer suffered a loss
 The original or better copy is required to determine the validity of the claim
Outlined required evaluation and reporting from Federal agencies resulting from check truncation:
 Consumer funds availability improvements



Economic and operational efficiencies
Increase or decrease in check-related fraud losses
Assessment of consumer acceptance
1/8/14
Question:
What is the purpose of the FFIEC?
Answer:
The Federal Financial Institutions Examination Council (FFIEC) is a formal interagency body empowered to:
Prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by:
 Board of Governors of the Federal Reserve System (FRB)
 Federal Deposit Insurance Corporation (FDIC)
 National Credit Union Administration (NCUA)
 Office of the Comptroller of the Currency (OCC), and
 Consumer Financial Protection Bureau (CFPB)
Make recommendations to promote uniformity in the supervision of financial institutions
1/9/14
Question:
What is the purpose of the Uniform Commercial Code?
Answer:
As outlined in the first article of the Uniform Commercial Code, the purpose and policies of the UCC are to:
 Simplify, clarify, and modernize the law governing commercial transactions
 Permit the continued expansion of commercial practices through custom, usage, and agreement of the
parties
 Make uniform the law among the various jurisdictions.
The Uniform Commercial Code does not have legal effect in a State or US territory unless UCC provisions are
enacted by the individual legislatures as statutes.
Articles 3 and 4 of the UCC apply directly to uniform check law and work in combination with Federal Reserve
regulations and operating circulars
1/10/14
Question:
What do the provisions of Article 3 and Article 4 of the Uniform Commercial Code (UCC) cover?
Answer:
U.C.C. - Article 3 - Negotiable Instruments: Deals with negotiable instruments such as checks, money orders or
traveler’s checks. The main provisions cover:
 Part 1. General Provisions and Definitions
 Part 2. Negotiation, Transfer, and Indorsement
 Part 3. Enforcement of Instruments
 Part 4. Liability of Parties
 Part 5. Dishonor

Part 6. Discharge and Payment
U.C.C. - Article 4 – Bank Deposits and Collections. Deals with the responsibilities for the collection of items
through Depositary, Collecting, and Payor Banks. The main provisions cover:
 Part 1. General Provisions and Definitions
 Part 2. Collection of Items: Depositary and Collecting Banks
 Part 3. Collection of Items: Payor Banks.
 Part 4. Relationship Between Payor Bank and Its Customer
 Part 5. Collection of Documentary Drafts
1/13/14
Question:
In the event of inconsistent provisions, which check rules or regulations prevail?
Answer:
In general, Federal law preempts State law in cases of inconsistency 
Reg CC Section § 229.41 –
The provisions of this subpart supersede any inconsistent provisions of the U.C.C. as adopted in any
state, or of any other state law, but only to the extent of the inconsistency.

UCC Section § 3-102 –
(c) Regulations of the Board of Governors of the Federal Reserve System and operating circulars of the
Federal Reserve Banks supersede any inconsistent provision of this Article to the extent of the
inconsistency.

Reg J Section § 210.3 –
(f) 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 (Regulation CC), but only to the extent of the
inconsistency.
1/14/14
Question:
What options are available in the U.S. for image exchange rules coverage?
Answer:
Either Federal Reserve or Private Sector Rules (Clearing House or unique agreement) options exist for image
exchange rules coverage in the U.S.:

Federal Reserve Image Exchange Rules
o Operating Circular 3 (OC3) applies to the handling of all cash items accepted for forward
collection and all returned checks accepted for return by the Federal Reserve
 The Fed is itself a party to the sending and receiving of items under these rules
 Incorporates Federal and State regulations (Reg J, Reg CC and UCC) regarding check
processing, and
 Includes any additional Reserve Bank provisions for Fed exchanges

Private Sector Image Exchange Rules
o ECCHO Rules – applies to the forward collection and/ or return of check images between
ECCHO members that agree to exchange images under the ECCHO Rules
 ECCHO is not a direct party



Participation under Rules is voluntary, but once agreed must conform to Rules provisions
Incorporates Federal and State regulations (Reg J, Reg CC and UCC) regarding check
processing
May vary by agreement between exchanging members
o Bi-lateral or Multi-lateral Agreements – unique rules for exchanging images between two or
more parties respectively, and outline specific areas of interest for that exchange
 Have to be renegotiated for each new relationship added outside of the bi- or multi-lateral
exchanging parties
1/15/14
Question:
Does Check 21 provide legal rules or address check image exchanges between banks?
Answer:
No. Check 21 only provides legal recognition and equivalency of substitute checks. Additional agreements
and/or rules are required for image exchanges. The Act does not govern image exchanges, and therefore image
exchanges still need to be performed under agreement between the parties.
Additional Information
See white paper located at http://www.checkimagecentral.org titled, “The Role of Private Sector Rules and
Federal Reserve System Rules in Check Image Exchange”, prepared by the CheckImage Collaborative, dated:
February 12, 2008.
It states, in summary, that check image rules establish the legal rights and obligations of financial institutions in
connection with their forward and return check image exchanges. Rules and other agreements are required to
address operational and technical requirements to reduce risk to exchange participants and can allow the same
or compatible rules to be applied to check image exchanges across multiple financial institutions and multiple
exchange networks.
Financial institutions that exchange check images without coverage under check image rules, or other
agreements that address the unique legal issues associated with check image exchange, potentially expose the
sending and receiving financial institutions to increased payment and operational risks.
1/16/14
Question:
What role does the Federal Reserve play in the U.S. financial payments system?
Answer:
 The Federal Reserve has a mandate from Congress to promote an efficient nationwide payments
system. Since 1987, the Reserve Board has –
o Revamped check-return system
o Improved presentment rights of private-sector banks
o Established rules governing Funds Availability
o Supported Check 21 to Congress – Substitute Checks paved the way for technology
improvements to speed check collection and reduce processing costs

The twelve Federal Reserve Banks also provide banking services to depository institutions and to the
federal government:
o For depository institutions, maintain accounts and provide services to –



Collect checks and settle interbank payments
Electronically transfer funds
Distribute and receive currency and coin to meet the public’s demand
o For the federal government, acts as fiscal agents to –
 Pay Treasury checks
 Process electronic payments
 Issues, transfers, and redeems U.S. government securities
1/17/14
Question:
What regulations apply to items exchanged through the Federal Reserve?
Answer:
For the handling of all cash items accepted for forward collection and all returned checks accepted for return by
the Federal Reserve, the following rules and regulations apply:

Regulation J (Reg J)
o Establishes procedures, duties, and responsibilities among –
 Federal Reserve Banks
 Senders and payors of checks and other items
 Senders and recipients of Fedwire funds transfers
o Legal framework for collecting checks and other items, and to settle balances through the
Federal Reserve
o Works in conjunction with Federal and State regulations, and Federal Reserve operating circulars

Operating Circular No. 3 (OC3)
o Specific terms and conditions for handling items through the Federal Reserve
 Additional detail to provisions established under Reg J
o The Fed is itself a party to the sending and receiving of items under these rules
o Incorporates Federal and State regulations (Reg J, Reg CC and UCC) regarding check processing
o Regulation CC (Reg CC)
o Federal regulation which governs the availability of funds deposited in checking accounts and
the collection and return of checks

Uniform Commercial Code (UCC)
o Does not have legal effect in a State or US territory unless UCC provisions are enacted by the
individual legislatures as statutes
o Articles 3 and 4 of the UCC apply directly to uniform check law and work in combination with
Federal Reserve regulations and operating circulars –
 Article 3 deals with negotiable instruments such as checks, money orders or traveler’s
checks
 Article 4 covers the bank deposits and collections
1/20/14
Question:
According to the Federal Reserve Operating Circular No. 3 (OC3), what items are eligible for image exchange?
Answer:
The Federal Reserve Banks Operating Circular No. 3 (OC3) outlines eligibility for both paper and image cash
letters in terms of cash items or non-cash items:
The process of sending items via image exchange equates to sending an “electronic item” to the Federal
Reserve, which –




Is an electronic image of an item and information describing that item that a Reserve Bank agrees to
handle as a cash item;
o Checks payable in a state of the U.S. (under Section 210.2 of Regulation J *)
o Government checks
o Postal money orders
Must conform to the Reserve Bank’s technical requirements for processing electronic items;
The data must be captured from a check, which “by definition must be paper”; and
May be forward collection or return item.
* Section 210.2 of Regulation J – “State” means a State of the United States, the District of Columbia, Puerto
Rico, or a territory, possession or dependency of the United States:
- The Virgin Islands and Puerto Rico are deemed to be in the Second Federal Reserve District
- Guam, American Samoa and the Northern Mariana Islands are deemed to be in the Twelfth Federal
Reserve District
1/21/14
Question:
According to OC3, what items may not be included in Image Cash Letters sent to the Federal Reserve?
Answer:
The Federal Reserve Banks Operating Circular No. 3 (OC3), Section 7.3 outlines ineligibility as follows:

An image cash letter or image return letter sent to the Reserve Bank may not include an electronic item
derived from:
o Items in carrier envelopes
o Food coupons
o Foreign items
o Photocopies of missing or destroyed items
o Notices in lieu of return
1/22/14
Question:
What are the ECCHO Rules?
Answer:
ECCHO Rules are private sector clearinghouse rules which apply to the exchange of electronic check
transactions between ECCHO Member financial institutions.

ECCHO Rules –
o Are clearinghouse rules under the Uniform Commercial Code (UCC)
o Provide a legal framework for both forward presentment and return of check images through
ECCHO image exchanges
o Work in conjunction with Federal and State regulations (Reg CC and UCC)
o Only apply by agreement between ECCHO Members
o Establish procedures, duties, and responsibilities between senders and receivers of check images
exchanged through ECCHO image exchanges
1/23/14
Question:
According to the ECCHO Rules, what items are eligible for image exchange?
Answer:
ECCHO Rules, Section XIX (C) outlines image eligibility as follows:
 the item is defined as a “check” under Section 229.2(k) of Regulation CC;
 the item is a Fully Qualified Item; and
 the Sending Bank and the Receiving Bank have entered into an agreement and the item is eligible for
imaging under that agreement.
Additional Information
ECCHO considerations for item image eligibility:



A Sending Bank and a Receiving Bank may under their image exchange agreement permit the exchange
of images of items that are not Fully Qualified (for example, As-Read or Partial MICR information).
An item in a carrier is eligible for imaging if both:
1. The front and back of the item is visible through the carrier, and
 Carrier also must qualify for handling by automated check processing equipment
2. The item otherwise meets the requirements for the item eligibility in Section XIX
If the carrier is encoded, the carrier, and not the item, must be fully qualified in compliance with the
ECCHO Rules
1/24/14
Question:
What provisions are included in the predominant image exchange rules to address the exchange of images of
savings bonds?
Answer:
 Federal Reserve OC3 (July 2012): Requirements associated with bonds deposited electronically
o Agreement required for separately sorted ICL deposits
o Files must conform to ANSI X9.37 and UCD requirements
o MICR line requirements:
 With preprinted MICR line: Must contain full MICR line in Type 25 item detail record
 Without preprinted MICR line: Only the routing number for savings bonds and the
redemption amount in Type 25 item detail record are required
o Physical endorsements are not required
 Electronic endorsements in Type 26 or Type 28 records required, consistent with check
image deposit guidelines
o Physical amount encoding is not required
o New adjustment type: Pricing Error Adjustment (PEA)

ECCHO Rules (December 2013): Section XVII: Transmission of Images of Savings Bonds for
Redemption by U.S. Treasury Department
o Section provides agreement to transmit images of Savings Bonds between Members with
exclusions
o Bonds do not meet requirements for image eligibility under Rules
o Rule establishes general standard of care applicable to handling Savings Bond similar to typical
correspondent bank arrangements
o Comingling of Images of Savings Bonds and Checks allowed
o Industry Formats and Standards for Data File - Must follow specifications set forth in Fed Quick
Reference Guide
o Bank may reject and return image of Bond for any reason prior to payment by Fed
o Payment subject to correction and adjustment from Treasury or Federal Reserve Bank (as fiscal
agent to US Treasury)
 Sending Bank responsible for full amount of rejected, returned image, correction or
adjustment
o Required use of adjustment process
 Receiving Bank will send adjustment claim with entry to Sending Bank that originally
sent image to the Receiving Bank
Additional Information
 Treasury Requirements: All exchange of bonds subject to regulations and guidelines of Bureau of Public
Debt (BPD).
o Paying Agent Stamp: Financial institution that is the Paying Agent must apply paying agent
stamp to the front of the savings bond prior to imaging
 Should not interfere with any of the information in the MICR line or with serial number
reflected on the front of the savings bond
o Retention and Destruction: Paying agents must retain paper savings bond for at least 30 calendar
days following the date that the ICL containing the paid savings bond was submitted to the FRB
o Paper savings bonds must be stored in a secured location with physical, procedural
and systemic controls in place
At the end of the retention period, paper savings bonds must be destroyed in a manner that adequately destroys
any personally identifiable information (PII) beyond recognition and reconstruction
1/27/14
Question:
What Rules and/or Regulations provide oversight for checks converted to ACH?
Answer:
It depends on the Standard Entry Class code (SEC code).
 Accounts Receivable Entry (ARC)
 Point-of-Purchase Entry (POP)
 Back Office Conversion Entry (BOC)
o Initiated as paper checks but, once converted to ACH for payment and clearing, are no longer
bound by the laws governing check payments
NACHA Rules - Provide the legal framework for moving transactions through the ACH system:
 Responsibilities, liabilities, and warranties of participants
 Availability of funds for converted check transactions
 Return timeframes for converted check transactions
Regulation E (Reg E) – Provide consumer protection for consumers whose accounts are debited or credited via
ACH.
o Initiated through an electronic terminal or telephone
o Purpose of ordering, instructing, or authorizing a financial institution to debit or credit an account
Additional Information

Re-presented Check Entry (RCK) – Originated as a check that has been dishonored
o Continues to be treated as a check transaction even though it is being processed as an ACH
transaction
 Reg CC, Uniform Commercial Code, ACH Rules apply but not Reg E

Destroyed Check Entry (XCK) – Originated as a check contained within cash letter that has been lost,
destroyed or otherwise unavailable
o Continues to be treated as a check transaction even though it is being processed as an ACH
transaction
 Reg CC, Uniform Commercial Code, ACH Rules apply but not Reg E
1/28/14
Question:
When converting a check to an ARC, POP, or BOC transaction, what are the authorization requirements?
Answer:
Authorization Requirements:
 ARC: Notice must be provided to Receiver
 POP: Authorization must be on the receipt signed at time of purchase
 BOC: Signage & written notice at time of payment (Ex: At the check-out or where check is presented as
“source document” to the Originator)
Additional Information
Other SEC codes Authorization Requirements;
 RCK: Signage or written notice at time of payment
 XCK: ODFI warrants it has the necessary authority to initiate the XCK entry.
1/29/14
Question:
When converting a check to an ARC, POP, or BOC transaction, what are the authorization
requirements?
Answer:
Authorization Requirements:
 ARC: Notice must be provided to Receiver
 POP: Authorization must be on the receipt signed at time of purchase
 BOC: Signage & written notice at time of payment (Ex: At the check-out or where check is presented as
“source document” to the Originator)
Additional Information
Other SEC codes Authorization Requirements;
 RCK: Signage or written notice at time of payment
 XCK: ODFI warrants it has the necessary authority to initiate the XCK entry.
1/30/14
Question:
How does Reg CC define a “check”?
Answer:
Reg CC section § 229.2 (k) defines a check as –




A negotiable demand draft drawn on or payable through or at an office of a bank;
A negotiable demand draft drawn on a Federal Reserve Bank or a Federal Home Loan Bank;
A negotiable demand draft drawn on the Treasury of the United States;
A demand draft drawn on a state government or unit of general local government that is not payable
through or at a bank;
 A United States Postal Service (USPS) money order; OR
 A traveler's check drawn on or payable through or at a bank
AND is 
Payable in U.S. funds
o Either an original or substitute check
Additional Information:
See Uniform Commerical Code (UCC) for negotiable instrument, draft and check definitions:
UCC 3-104 defines a negotiable instrument as a written order signed by the drawer or an unconditional promise
to pay a fixed sum of money.



Unconditional unless it states an express condition to payment
o Promise or order subject to, or governed by, another record;
o Rights or obligations with respect to promise or order stated in another record
An instrument as defined by UCC is a draft if it is an order or a note if it is a promise
Check definition found within the negotiable instrument definition – see UCC [3-104(f)]
o Check: A draft payable on demand and drawn on a bank
o Includes cashier's check or teller's check even though described by another term (i.e. a “money
order“)
1/31/14
Question:
What types of items must be given “next-day availability”?
Answer:
Reg CC Section §229.10 states when deposits of various types must be made available to a bank’s customers,
measured in business days following the banking day on which the deposit is made:
The following types of deposits must be made available on the first business day following the banking day of
deposit (“next-day availability”):



Cash
Electronic payments (under other rules, funds for most electronic deposits are made available on the day
of deposit)
Check deposits made in person –
o U.S. Postal Service Money Orders
o Checks drawn on the Federal Reserve
o State or local government checks

o Cashier’s, certified, or teller’s checks
o On-us checks
Check deposits made in person or at a proprietary ATM –
o U.S. Treasury checks deposited in an account held by a payee of the check
Note: The first $200 (or the total amount of the deposit if it is less than $200) of non-“next-day” checks must
be made available the next day.
2/3/14
Question:
Under what conditions may a bank delay the availability of funds on deposited checks?
Answer:
Reg CC Section §229.13 permits financial institutions to delay the availability of funds applied to a deposit
under certain conditions for a “reasonable period of time”, which is generally outlined as:
o On-us checks - one additional business day (total of two business days)
o Non on-us checks - five additional business days (total of seven business days)

Not eligible for extended holds:
o Deposited cash
o Electronic payments (deposits)

Eligible for extended holds:
o Large deposits (greater than $5,000)  First $5,000 of deposit is subject to the availability otherwise provided for checks
 Amount in excess of $5,000 may be held for an additional period of time
o Re-deposited checks  May be held unless the check was returned because of missing indorsement or postdated
check
o Deposits to accounts that are repeatedly overdrawn  An account may be considered repeatedly overdrawn and items may be held if during the
previous six months the account was negative as follows:
 Six or more banking days
 Two or more banking days in the amount of $5,000 or more
o Reasonable cause to doubt the collectability of a check  May exist for postdated checks or checks that the paying institution has said it will not
honor
o Checks deposited during emergency conditions  Beyond the control of the financial institution such as natural disasters or
communications malfunctions
o Deposits into accounts of new customers  Accounts open less than 30 days
 Next-day availability applies only to cash, electronic payments, and the first $5,000 of
any other next-day items (e.g.; cashier's, certified, teller's, traveler's, and federal, state and
local government checks)
 Remaining amount from large deposit holds must be available by the ninth business day.
2/4/14
Question:
What disclosures are required per Reg CC?
Answer:
 Section § 229.15 General disclosure requirements
o Requires that disclosures set forth under subpart B be written clearly and conspicuously and in a
form that the customer can keep.
 Section § 229.16 Specific availability-policy disclosure
o Stipulates that a bank must provide disclosure statements describing its policy as to when funds
deposited in an account are available for withdrawal. *
 Section § 229.17 Initial disclosures
o States that banks must disclose their specific availability policies to potential customers prior to
opening a new account.
 Section § 229.18 Additional disclosure requirements
o Requires banks to make certain disclosures:
 On all preprinted deposit slips provided to customers
 At all locations where bank employees accept consumer deposits
 At automated teller machines (ATMs)
 Upon request
 When any changes are made to their policies
 Section § 229.57 Consumer awareness (Substitute Check) disclosures
o Requires banks make disclosure statements informing consumers –
 A substitute check is the legal equivalent of an original check
 Recredit rights that apply when a substitute check was not properly charged to an account
2/5/14
Question:
According to Reg CC, what does it mean to return an item expeditiously?
Answer:
Regulation CC, Section § 229.30 Paying Bank’s responsibility for return of checks, requires the "expeditious"
return of checks:

A paying bank returns a check expeditiously if it:
o Returns the check to the depositary bank within two business days of presentment
o Sends the check in the same manner as it (or a similarly situated bank) would have sent the check
for forward collection.
Additional Information
Once the Paying Bank makes the decision to dishonor and return the item, it must meet both return timings:
 UCC requirement to get the return out by the midnight deadline);and
 Reg CC requirement to return the item in an expeditious manner

The Uniform Commerical Code (UCC) Article 4 (§ 4-301) states:
o Paying Bank may return item before it has made final payment and before its midnight deadline,
which is midnight on its next banking day following the banking day on which it received the
relevant item, if the Paying Bank:
 Returns the item; or
 Returns an image of the item, by agreement and the image is returned in accordance with
that agreement; or
 Provides notice of dishonor or nonpayment if the item is unavailable for return.
2/6/14
Question:
What is a Remotely Created Check?
Answer:
Reg CC Section § 229.2 (fff) defined a Remotely Created Check (RCC) as:

a check that is not created by the paying bank and that does not bear a signature applied, or purported to
be applied, by the person on whose account the check is drawn.
Examples of uses for RCC’s:

A check authorized by a consumer over the telephone that is not created by the paying bank and bears a
legend on the signature line, such as “Authorized by Drawer,” –
o Credit card payment made over the phone today to avoid late charges
o Purchase made over the phone to a telemarketer by someone who doesn’t have a credit card
o Compensate a merchant for the return of an initial paper check due to insufficient funds
2/7/14
Question:
What recourse does a consumer/ Paying Bank have for an unauthorized RCC?
Answer:
 Consumer recourse for unauthorized Remotely Created Check (RCC):
o If identified within the bank's deadline for statement examination and the bank cannot verify that
the customer actually authorized the charge, the customer is entitled to a refund.
o Valid reason for consumer claims –
 Depositor did not authorize the check
o Invalid reasons for consumer claims –
 Oral authorization obtained and recorded, the depositor forgot about it
 Charge was authorized, depositor is now experiencing "buyer's remorse"

Paying Bank recourse for suspected unauthorized Remotely Created Check (RCC):
o If identified prior to its midnight deadline, may be returned per UCC Section § 4-301.
o If identified after its midnight deadline has passed:
 May submit a breach of warranty claim per Reg CC Section § 229.34 that the item is not
authorized –
 A bank that transfers or presents a remotely created check and receives a
settlement or other consideration warrants to the transferee bank, any subsequent
collecting bank, and the paying bank that the person on whose account the
remotely created check is drawn authorized the issuance of the check in the
amount stated on the check and to the payee stated on the check.
 Within 30 days after the claimant has reason to know of the breach and the
identity of the warranting bank
2/10/14
Question:
What warranties are outlined in Regulation CC?
Answer:
0 B
3 B
3
0 B
B
Section
§ 229.34
Warranty
2 B
2 B
A p p l i c a t i o n t o B a n ks
a n d / o r C u s t o me r s :
(a) Return Warranties
Each paying bank or returning bank that transfers a returned check
warrants to transferee returning bank, to any subsequent returning bank,
depositary bank, and owner of the check, that:


1 5
B 1
5
B
1 6
B 1
6
B
2 5
B 2
5
B
In t e r b a n k
O wn e r o f t h e c h e c k
Return is timely under UCC and Reg CC
(2) Bank is authorized to return the check;
(3) Check has not been materially altered;
(4) In the case of a notice in lieu of return, the original
check has not and will not be returned
(b) Warranty of notice of nonpayment
(1)
Paying bank warrants that:
Return is or will be timely under UCC and Reg CC
(2) Bank is authorized to send notice; and
(3) The check has not been materially altered
(1)
(c) Warranty of settlement amount, encoding and offset: Bank that
transfers or presents check warrants:

In t e r b a n k o n l y
Total amount presented equals total amount
requested for settlement
(2) Accompanying information accurately indicates
total amount of check transferred
(3) Warrants that information encoded on check after
issue is correct
(1)
(d) Transfer and presentment warranties (Remotely Created Check):
Transfer bank warrants that RCC item authorized in amount and
payee stated on check
§
229.52(a)
2 6
B 2
6
B
Substitute Check Warranties
Bank that transfers, presents, or returns a substitute check (or a paper or
electronic representation of a substitute check) for which it receives
consideration warrants that:
Substitute check meets requirements for legal
equivalence [§ 229.51(a)(1)-(2)]; and
(2) No duplicate payment



In t e r b a n k
The recipient of the
substitute check
3 0
B 3
0
B
3 1
B 3
1
B
An y s u b s e q u e n t
recipient of th e
substitute check
3 2
B 3
2
B
(1)
2/11/14
Question:
How does the Uniform Commercial Code define “negotiable instruments”?
Answer:
The Uniform Commercial Code (UCC) Article 3, section § 3-104 defines a negotiable instrument as –
 a written promise or order




to pay a specified amount of money, although interest may be added,
to the person named on the instrument, or to the bearer of the instrument,
on demand or at a fixed future time
without the requirement for the person promising payment to perform any act in addition to paying the
money specified
2/12/14
Question:
In the case of an item with differing courtesy and legal amounts, which amount is correct?
Answer:
Uniform Commercial Code (UCC) Section § 3-114 provides clarification on differing amounts on an item:
 If an item contains contradictory terms:
o Handwritten terms prevail over typewritten and printed terms
o Typewritten terms prevail over printed terms
o Words prevail over numbers
2/13/14
Question:
What does it mean to “negotiate” an item?
Answer:
Uniform Commercial Code (UCC) Section § 3-201(a) defines negotiation as –

The transfer of possession of an instrument – whether voluntary or involuntary –
o BY a person other than the issuer
o TO a person who becomes a holder
Requirements for negotiation of an instrument:

Instrument payable to an identifiable person requires both:
o Transfer of possession of the instrument; AND
o Indorsement of the instrument by the holder

Instrument payable to bearer:
o Transfer of possession alone
2/14/14
Question:
What is an Indorsement, how is one provided, and by whom?
Answer:
What is an Indorsement?

Uniform Commercial Code (UCC) Article 3, section § 3-204(a) defines indorsement as –
o A signature that is made on an instrument for the purpose of negotiating the instrument
How is one provided?

Uniform Commercial Code (UCC) Article 3, section § 3-401(b) indicates that a signature –
o May be made manually or by means of a device or machine; and
o Includes a name or - if they are executed or adopted by a person with a present intention to
authenticate a writing – a word, mark or symbol
By whom?
 The way a check is made payable will determine who must negotiate/indorse it. Checks may be payable
to Bearer or to Order (UCC section § 3-109):
o Payable to Bearer - means the holder of the item can negotiate it
o Payable to Order – means it is payable to an identified person and the identified person (or that
person’s representative) must indorse the item or deposit it into his account
o If payable to multiple parties (UCC section § 3-110(d) ) –
 Two or more parties with "and" in the middle, both must indorse it
 Two or more parties with the names separated by "or" or "and/or", either party can
indorse it
2/17/14
Question:
What are different types of indorsements?
Answer:
Per the Uniform Commercial Code (UCC) Article 3, sections § 3-205 and § 3-206, an identified person may
indorse an instrument for the purposes of negotiating the instrument in the following ways:




Special Indorsement –
o Identifies the person to whom an instrument is payable
o Makes the instrument an Order instrument
o May only be negotiated by the identified person
Blank Indorsement –
o Does not identify a payee, is not a Special Indorsement
o Consists of only a signature
o Becomes a Bearer instrument
o May be converted into a Special Indorsement by writing, above the signature, words identifying
the person to whom an instrument is payable
Anomalous Indorsement –
o Made by person who is not the holder of the instrument
o Does not affect the manner in which the instrument may be negotiated
Restrictive Indorsement –
 Restricts negotiability of the instrument – words indicating payment is to be made:
o For a particular account or to a particular bank “For deposit only” or “For collection”
o To an agent for the benefit of the indorser or another person
 Does not prevent someone from becoming a holder in due course
 In order to become a holder in due course, the holder must –
o Take the item “for value” back to the indorser
o Obey the restrictions on the indorsement
2/18/14
Question:
What does Holder In Due Course mean?
Answer:
As described in greater detail in UCC Article 3 Section § 3-302, a holder in due course is anyone who accepts a
check for payment so long as:


The check “does not bear such apparent evidence of forgery or alteration” and
The holder took the check for value, in good faith, and does not have knowledge of any fraud related to
it.
2/19/14
Question:
What is the difference between a “Holder” and a “Holder In Due Course”?
Answer:
 One becomes a holder of an instrument through negotiation;
o Bearer instrument – the holder must have the instrument in his/ her possession
o Identified instrument – the holder must be identified on the instrument and must have the
instrument in his/ her possession
 To become a holder in due course, the holder must have actually given value (provided a good or
service) for the instrument
2/20/14
Question:
What type of indorsement is a bank indorsement?
Answer:
Generally, the words “pay any bank” (or the like) make a bank indorsement a restrictive indorsement.



The Uniform Commercial Code (UCC) section § 4-201 –
o Describes that a Collecting Bank plays the role of agent (or sub-agent) for the item’s owner in
the collection process regardless of the form, or lack of, indorsement
o Outlines that once an item has been indorsed “pay any bank” or the like, only a bank may
acquire the rights of a Holder until the item has been either:
 Returned to the customer who initiated collection
 Specially indorsed by a bank to a person who is not a bank
Reg CC section §229.35 requires that banks –
o Use a standard form of indorsement when indorsing checks during the forward collection and
return process
o The indorsement standard:
 Provides for indorsements by all collecting and returning banks
 Includes a unique standard for depositary bank indorsements
 Is designed to facilitate the identification of the depositary bank and the prompt return of
checks
 Places a duty on banks to ensure that their indorsements can be interpreted by any person
 Specifies the information each indorsement must contain and its location and ink color
Commentary to Reg CC section §229.35 –
 Protects the rights of a customer depositing a check in a bank without requiring the words “pay any
bank,” as required by the UCC:
o Use of this language in a depositary bank's indorsement will make it more difficult for other
banks to identify the depositary bank
o The indorsement standard [in the appendix to section 229.35] prohibits such material in
subsequent collecting bank indorsements
o The existence of a bank indorsement provides notice of the restrictive indorsement without any
additional words
2/21/14
Question:
What is the Univeral Companion Document (UCD) and what is its purpose?
Answer:
Universal Companion Document – Was developed by the CheckImage Collaborative’s Image Quality Work
Group with input from a wide range of financial institutions as well as major image exchange providers. The
UCD was designed to:
 Formalize an industry standard for check image exchange using the ANSI X9.100-187 standard format
 Establish a uniform industry approach for populating and validating check image files.
 Not intended to replace the ANSI X9.100-187 standard
o Clarifies how financial institutions should use the standard to ensure all necessary and
appropriate payment data is exchanged between collecting and paying institutions
Additional Information
 The CheckImage Collaborative initiated by the Electronic Check Clearing House Organization
(ECCHO) and the Retail Payments Office (RPO) of the Federal Reserve Bank of Atlanta
o Comprised of representatives from trade associations and financial organizations.
o Formed in early 2005 to identify and share information on check image clearing that will help
financial institutions understand and successfully implement image exchange.
For additional industry information and education about check image clearing including industry statistics and
various white papers available at: www.checkimagecentral.org
2/24/14
Question:
How does the UCD require a bank to identify itself in an X9 image cash letter?
Answer:
There are two ways in which bank indorsements are carried in the X9.100-187 standard:
 Physical indorsements on the check image contained in the Image View Data Record (Type 52)
 Electronic information carried in each item’s related X9 records
o Forward item records:
 Check Item Detail Record (Type 25)
 Check Detail Addendum A Record (Type 26)
 Check Detail Addendum C Record (Type 28)
o Return item records:
 Return Record (Type 31)
 Return Addendum A Record (Type 32)
 Return Addendum B Record (Type 33)
 Return Addendum D Record (Type 35)
Additional Information
The purpose of the Universal Companion Document (UCD) is to formalize an industry standard for check
image exchange using the ANS X9.100-187 standard format and a compilation of industry best practices.
It is not intended to replace the ANS X9.100-187 standard, but rather to clarify how financial institutions should
use the standard to ensure all necessary and appropriate payment data is exchanged between collecting and
paying institutions.
2/25/14
Question:
What structural file processing requirements are outlined in the UCD for the ANS X9.100-187 image cash letter
standard?
Answer:
 The UCD provides field validation requirements which are defined in the tables for each record. Control
Record errors or file corruption type errors will result in a file rejection. Item record level errors will
result in an item level reject and will be adjusted back or returned as an administrative return using a
defined value of “2” as the Return Reason Code. Field level edit information is included in the tables for
each record type.
 The following lists structural requirements for ANS X9.100-187 image exchange files:
 Structural Requirements for File Processing – Failure to meet processing requirements will result in file
rejection, when:
o All Header Records DO NOT have a corresponding Control Record as shown:
 File Header Record (Type 01) – File Control Record (Type 99)
 Cash Letter Header Record (Type 10) – Cash Letter Control Record (Type 90)
 Bundle Header Record (Type 20) – Bundle Control Record (Type 70)
o All records are NOT properly sequenced in accordance with X9.100-187
 Addendum counts DO NOT correspond to the number of addendum records included
 Item Counts or Dollar Amounts in Bundle, Cash Letter, and File Control Records fail to balance
For more information, see the complete UCD available on the CheckImage Collaborative website at:
www.checkimagecentral.org/TechnicalResources/
Additional Information
Structural Requirements for Item Processing – Failure to meet processing requirements will result in item level
rejects, when
 Image View Detail Record (Type 50) DOES NOT have a corresponding Image View Data Record
(Type 52).
 Check Detail Record (Type 25), DOES NOT have at least one Type 26 or Type 28 Addendum record.
Return Record (Type 31) DOES NOT have at least one Type 32 and one Type 35 Addendum record (See
Validation Table for exception when Returns Indicator (Field 14 in Record Type 10) has a defined value of “E”
(Administrative).
2/26/14
Question:
What information is contained in the forward collection item record Types 25, 26 and/or 28?
Answer:
The ANS X9.100-187 standard defines these record types as follows –


Check Detail Record (Type 25)
o “The item”
o Contains the MICR line information of the check, the ECE Item Sequence Number and other
indicators for processing
Check Detail Addendum A Record (Type 26)
o Typically referred to as the Bank of First Deposit (BOFD) indorsement record
o Contains the routing number of the item return location
o Multiple Type 26 records indicate multiple presentments of an item




Check Detail Addendum C Record (Type 28)
o Typically referred to as Subsequent Indorsement record
o Contains the indorsement information for any institution handling the item subsequent to the
depositary bank (BOFD)
o Each subsequent collecting bank will identify itself by applying an additional Type 28 record in
addition to retaining all previous indorsement records
If the physical indorsement is not visible in the image, each item is required to have one Type 26 or
Type 28 record.
An item may have multiples of each record type in the case of multiple presentments and in the case of
multiple subsequent indorsements
To represent items returned electronically, each item’s Type 31, Type 32, Type 33 and Type 35 records
will be retained in the Forward Presentment files corresponding Type 25, Type 26 and Type 28 records
2/27/14
Question:
What is “Flipping” in terms of records in an Image Cash letter file?
Answer:
“Flipping” is the process of transcribing the information in an X9 Image Cash Letter from the forward
presentment Check Detail record types (20-series records) to the Return Item record types (30-series records).
 When an electronically presented item is returned
o The item’s electronically presented Type 25, Type 26 and Type 28 records will be retained in the
Returned Item files corresponding Type 31, Type 32, Type 33 and Type 35 records
 If the electronically returned item is then represented, each of the item’s Type 31, Type 32, Type 33 and
Type 35 records will be retained in the Forward Presentment file’s corresponding Type 25, Type 26 and
Type 28 records
2/28/14
Question:
What information is contained in the returned item record Types 31, 32, 33 and/or 35?
Answer:
The ANS X9.100-187 standard defines these record types as follows –
 Return Record (Type 31)
o The return item: Contains MICR line information of the check, the ECE Item Sequence Number,
the current return reason code and other indicators for processing
 MICR Auxiliary On-Us field is not contained on this record (See Record Type 33)
o Corresponds to the associated Check Detail (Type 25) record
 Return Addendum A Record (Type 32)
o Contains following data elements:
 Return location routing number
 Item sequence number (if present)
 Item business date
o Contains field values of the associated forward item (Type 26) record if available electronically
 May be multiple Type 32 records if there were multiple Type 26 records
 Return Addendum B Record (Type 33)
o Type 33 record typically only present when the item has MICR Auxiliary On-Us field
 Return Addendum D Record (Type 35)
o Returning bank will add an additional Type 35 record to the electronic history which includes the
return reason code
o Contains the field values in the associated flipped Type 28 record(s) if available electronically

 May be multiple Type 35 records if there were multiple Type 28 records
Each item’s electronically presented Type 25, Type 26 and Type 28 records will be retained in the
Returned Item files corresponding Type 31, Type 32, Type 33 and Type 35 records
Additional Information
 Current statutory (UCC) and regulatory (Reg CC) laws governing check payments do not list specific
reasons for an item to be dishonored and returned.
o ANS X9.100-187 image exchange standard provides a list of return reasons and the associated
codes that must be used for image exchange
 Proper usage of these return reason codes has become standard industry practice
o Return reason codes are used in Return Record (Type 31) and Return Addendum D Record
(Type 35) and the Return Reason may be carried on Check Detail Addendum C Record (Type
28) if it was associated with a previously returned and represented item
 A Paying Bank can return item for any reason as long as the return is within the legal return time frames
o UCC – Paying Bank must return item by midnight of the banking day following presentment
o Reg CC – Bank of First Deposit (BOFD) must receive the return by 4:00 p.m. local time two
days after presentment

Reg CC does not define reasons for returns
o However Reg CC [§229.30(d)] does place requirements on the Paying Bank to indicate on the
face of a check it is returning that:
 it is a return and
 the reason for return
For additional information on return code and proper usage of return reason codes, see the paper “Proper Use
Proper Use of Return Codes in Image Exchange” on the CheckImage Central website at
www.checkimagecentral.org/operationalPractices
3/3/14
Question:
If a Paying Bank chooses to dishonor an item, how long does it have to return the item?
Answer:
According to the Uniform Commercial Code (UCC) Section 4-301 –
 a Paying Bank may return an item, an image of the item, or send notice of dishonor by its midnight
deadline, which is defined as –
o “Midnight on the next banking day following the banking day on which the item was received”.
Additional Information
 Once the Paying Bank makes the decision to dishonor and return the item, it must meet both return
timings:
 UCC requirement to get the return out by the midnight deadline);and
 Reg CC requirement to return the item in an expeditious manner
 Regulation CC, (§ 229.30) states Paying Bank’s responsibility for return of checks, requires the
"expeditious" return of checks:
o A paying bank returns a check expeditiously if it:
 Returns the check to the depositary bank within two business days of presentment
 Sends the check in the same manner as it (or a similarly situated bank) would have sent
the check for forward collection.
3/4/14
Question:
When truncating and transmitting items electronically, how long must the item and associated information be
retained?
Answer:
There are multiple rules and regulations which apply to the retention of paper checks and the retention of the
associated electronic image and item data that have been truncated and transmitted via image exchange:
 Rules –
o ECCHO Rules – Allows the Sending Bank to determine a time period for the retention of
original check based on internal bank policy. Refers retention of the electronic image and
associated data to applicable law (see UCC Section 4-406 below.)
o OC3 – Does not establish a document (or associated electronic image and item data) retention
requirement.
 Regulations –
o Uniform Commercial Code (UCC) – Section 4-406 outlines that items must either be retained or
“maintain the capacity to furnish legible copies of the items until the expiration of seven years
after the receipt of the items”. However, UCC adoption may vary by state and may impose
different retention periods.
o Check 21 – Does not itself impose any unique retention requirements but “allows that a
substitute check shall be the legal equivalent of the original check for all purposes” including any
state or federal law provisions.
 Any party providing a substitute check to meet a UCC requirement to provide the item or
legible copy of the item must also retain images and all associated item information for
the same seven year retention period.
3/5/14
Question:
If an ineligible item is included in an Image Cash Letter, what is the process to reject that item back to the
Sending Bank?
Answer:
The Receiving Bank would handle ineligible items in accordance with any agreement with the Sending Bank,
the agreement or procedures of the exchange network through which the item was received, applicable check
law, or other practice that the Receiving Bank has developed with the Sending Bank:



Applicable law:
o UCC Midnight Deadline
o Reg CC requirements for timely (expeditious) return
Possible processes:
o Returns image cash letter (ICLR) with administrative reason code
o Fed chargebacks
o Manual processes such as secure email or fax
o (Any other processes outlined in the agreement between the Sending and Receiving Banks)
Additional Administrative Reasons:
o Poor quality image
o Ineligible item
o Missing image
o Codeline mis-match
o (Any others included in the agreement between the Sending and Receiving Banks)
3/6/14
Question:
What is Presentment?
Answer:
 The Uniform Commercial Code (UCC) Article 3, section § 3-501(a) defines presentment as o a demand made by or on behalf of a person entitled to enforce an instrument to pay the
instrument made to the drawee or a party obliged to pay the instrument
 The rules for presentment:
o Subject to UCC Article 4, agreement of the parties, and clearing-house rules
o Must be made at the place of payment and is effective at the time of indorsement and delivery if
indorsed by any one of two or more makers
o The item must be shown, reasonable identification of the presenter (or authorized presenter)
given, and when full payment is made the item surrendered
o The item may be returned to the presenter for lack of a necessary indorsement or for failure to
comply with the terms of the instrument, an agreement of the parties, or other applicable law or
rule
o Presentment may be deemed as occurring on the next business day after the day the indorsed
item is received by the payor if after the established cut-off hour of the payor
3/7/14
Question:
What does it mean to dishonor an item and what is Wrongful Dishonor?
Answer:
The Uniform Commercial Code (UCC) Article 3, section § 3-502 describes what it means to dishonor an item
as when –
 The Payor Bank returns a presented item by its midnight deadline either:
o Without paying or accepting the check; or
o Sends a timely notice of dishonor or non-payment
The UCC Article 4, section § 4-402 describes wrongful dishonor as when –
 The Payor Bank dishonors either:
o A properly payable item; or
o An item that would create an overdraft and the bank had agreed to pay the overdraft
Additional Information
 Per UCC Article 4, section § 4-402(c):
o A Payor Bank may make a determination at any time between when the item is received and
when it returns the item or notice of non-payment
o The account balance only needs to be checked once
o If the bank re-determines the account balance, the later balance is the one used to determine
whether an item is wrongfully dishonored