What is REGULATION CC ?
REGULATION CC – This regulation, published by the Federal Reserve Bank Board of Governors, implements the Expedited Funds Availability Act and the Check Clearing for the 21st Century Act.
Recently, the Federal Reserve released changes to Regulation CC (Reg CC) intended to reflect an industry-wide transition to an electronic, image-based check collection and returns environment. These final modifications take effect July 1, 2018.
Highlights from the Reg CC changes include:
- Reg CC to Cover Electronic Checks. Images of an original paper check are now included in Reg CC. They will be treated the same as original paper checks.
- Electronic Check Warranties. New warranties were created that apply to the exchange of electronic checks. The transferring bank warrants that check images accurately represent information on the front and back of the original check. Additionally, the warranty affirms that there’s no duplicate payment of the electronic check.
- Indemnity for Duplicate Payment from Remote Deposit Capture (RDC). This new indemnity protects a depository bank that received as unpaid a paper check deposit after the check was previously deposited by RDC at another depository bank. Under this indemnity, the depository bank accepting the original paper check is able to recover a loss from the depository bank receiving the item through RDC.
- Expeditious Return Requirement. Updates made to the expeditious returns requirement, or “two day test,” modify when checks must return to the depository bank. Currently, the requirement is 4 p.m. on the second business day after the item is presented. The new time is 2 p.m. This applies to both paper and electronic checks. There is also a protection from liability for the paying bank if the depository bank does not return the check by “commercially reasonable means.”
- Notification of Non-Payment. This applies to both paper and electronic checks. The notification time and threshold changed. Previously, the time for receipt was 4 p.m., and the threshold was $2,500. Under the new rule, the receipt deadline is earlier at 2 p.m., and the threshold is higher at $5,000.
- New Indemnities for Electronically Created Items (ECIs). ECIs are “check-like” items created in electronic form (never existed in paper form). ECIs are not electronic checks as currently defined by Reg CC, and therefore, not subject to other provisions of Reg CC. The new indemnity does cover losses from the ECIs, as it was never a paper check. Additionally, indemnification exists for an ECI that was unauthorized, as well as for a bank that pays a previously paid ECI.
- Substitute Check for ATM Deposits. When a depository bank rejects a deposit submitted from an ATM and returns a substitute check back, the depository bank warrants and indemnifies the check under the new Reg CC.
The check collection process is no longer a paper-based system, but rather an imaged check collection process. The changes to Reg CC recognize this and provide clarity for an electronic, image-based check collection and returns environment. The Reg CC modifications assist in expediting and providing additional protections that previously didn’t exist. These changes are an important step in bringing regulations up to date with current industry practices.
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