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InfoSight Highlight: Electronic Returns under Reg CC
Friday, February 24, 2017 6:35 AM

Regulation CC addresses the collection and return of checks through the banking system and is the rule that implements the Expedited Funds Availability Act (EFAA). The Uniform Commercial Code Article 4A governs the rights, duties, responsibilities and liabilities of the parties involved in the electronic funds transfers and Regulation J governs those electronic funds transfers through Fedwire.

When a paying bank (financial institution on which a check is drawn, including a payable through financial institution) decides to return a check, Regulation CC requires it to send the check or a notice within certain deadlines. Section 229.30(f) and 229.31(f) of the regulation requires the paying bank to return the original check unless the check is unavailable. If the check is unavailable, the paying bank may send a notice in lieu of return that includes specific information required by Regulation CC.

The Commentary to these sections explains that a notice is permitted instead of the actual check only when an institution does not have or cannot obtain the physical check, or must keep the physical check for protest. The Commentary states that a check is not considered unavailable for return simply because it is difficult to retrieve from a filing system or storage by a keeper of checks in a truncation system.

An "electronic return" is an arrangement whereby the paying bank sends, and the depository bank accepts, an electronic image or other notice in lieu of the return of the actual physical item itself. Provisions in Regulation CC, specifically additions to the Commentary for Section 229.37, allow financial institutions that have entered into agreements with other financial institutions to return checks electronically, even if such checks are considered available for return. Entering into these arrangements is strictly voluntary. Before your credit union enters into such agreements, keep in mind that not having the original item could affect your rights with the depositing member and others.

How do electronic returns affect the credit union?
Electronic returns may assist the credit union in being more efficient in both returning items drawn on the credit union and receiving the return of items deposited at the credit union, which the paying bank has chosen not to pay. However, the credit union may lose rights since it cannot bind remote parties to a check.

For example, rights against third-party endorsers could be lost. Thus, if a financial institution issues a notice when the physical check is considered available under Regulation CC, and then if the return of the check causes the party to suffer a loss, the credit union or the returning financial institution could be liable for damages. The financial institution that sent the notice could be liable even if it had agreed with the receiving depository institution to use notices in lieu of return. There could also be problems with initiating bad check charges against someone if the original check isn't available as evidence.

Source:  InfoSight Compliance

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