82 FR 25539 - Availability of Funds and Collection of Checks

FEDERAL RESERVE SYSTEM

Federal Register Volume 82, Issue 105 (June 2, 2017)

The Board is proposing to amend Regulation CC to address situations where there is a dispute as to whether a check has been altered or is a forgery, and the original paper check is not available for inspection. The proposed rule would adopt a presumption of alteration for any dispute over whether the dollar amount or the payee on a substitute check or electronic check has been altered or whether the substitute check or electronic check is derived from an original check that is a forgery. This rule is intended to provide clarity as to the burden of proof in these situations.

[Federal Register Volume 82, Number 105 (Friday, June 2, 2017)]
[Proposed Rules]
[Pages 25539-25542]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-11380]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 82, No. 105 / Friday, June 2, 2017 / Proposed 
Rules

[[Page 25539]]



FEDERAL RESERVE SYSTEM

12 CFR Part 229

[Regulation CC; Docket No. R-1564]
RIN 7100 AE 78


Availability of Funds and Collection of Checks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule, request for comment.

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SUMMARY: The Board is proposing to amend Regulation CC to address 
situations where there is a dispute as to whether a check has been 
altered or is a forgery, and the original paper check is not available 
for inspection. The proposed rule would adopt a presumption of 
alteration for any dispute over whether the dollar amount or the payee 
on a substitute check or electronic check has been altered or whether 
the substitute check or electronic check is derived from an original 
check that is a forgery. This rule is intended to provide clarity as to 
the burden of proof in these situations.

DATES: Comments must be submitted by August 1, 2017.

ADDRESSES: You may submit comments, identified by Docket No. R-1564 by 
any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/apps/foia/proposedregs.aspx.
     Email: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments are available on the Board's Web site at http://www.federalreserve.gov/apps/foia/proposedregs.aspx as submitted, 
except as necessary for technical reasons. Accordingly, your comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
3515, 1801 K Street NW. (between 18th and 19th Street NW.), Washington, 
DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Clinton N. Chen, Attorney (202/452-
3952), Legal Division; or Ian C.B. Spear, Senior Financial Services 
Analyst (202/452-3959), Division of Reserve Bank Operations and Payment 
Systems; for users of Telecommunication Devices for the Deaf (TDD) 
only, contact 202/263-4869; Board of Governors of the Federal Reserve 
System, 20th and C Streets NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    Congress enacted the Expedited Funds Availability Act of 1987 (EFA 
Act) to provide prompt funds availability for deposits in transaction 
accounts and to foster improvements in the check collection and return 
processes. Section 609(c) authorizes the Board to regulate any aspect 
of the payment system and any related function of the payment system 
with respect to checks in order to carry out the provisions of the EFA 
Act.\1\
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    \1\ EFA Act section 609(c)(1) states that ``[i]n order to carry 
out the provisions of this title, the Board of Governors of the 
Federal Reserve System shall have the responsibility to regulate--
(A) any aspect of the payment system, including the receipt, 
payment, collection, or clearing of checks; and (B) any related 
function of the payment system with respect to checks.'' 12 U.S.C. 
4008(c)(1).
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    Regulation CC implements the EFA Act. Subpart C of Regulation CC 
implements the EFA Act's provisions regarding forward collection and 
return of checks.

II. UCC Provisions Regarding Altered and Forged Checks

    Under the Uniform Commercial Code (UCC), an alteration is a change 
to the terms of a check that is made after the check is issued that 
modifies an obligation of a party by, for example, changing the payee's 
name or the amount of the check.\2\ By contrast, a forgery is a check 
on which the signature of the drawer (i.e., the account-holder at the 
paying bank) was made without authorization at the time of the check's 
issuance.\3\ In general, under UCC 4-401, the paying bank may charge 
the drawer's account only for checks that are properly payable.\4\ 
Neither altered checks nor forged checks are properly payable. In the 
case of an altered check under the UCC, the banks that received the 
check during forward collection, including the paying bank, have 
warranty claims against the banks that transferred the check (e.g., a 
collecting bank or the depositary bank). In the case of a forged check, 
however, the UCC places the responsibility on the paying bank for 
identifying the forgery.\5\ Therefore, the depositary bank typically 
bears the loss related to an altered check, whereas the paying bank 
bears the loss related to a forged check.
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    \2\ UCC 3-407. The UCC is a uniform body of laws promulgated by 
the American Law Institute and the Uniform Law Commission, which may 
be enacted by state legislatures. Article 3 addresses payment by 
check and other negotiable instruments while Article 4 addresses 
bank deposits.
    \3\ The term ``forgery'' is not defined in the UCC. However, the 
term ``unauthorized signature'' is defined as ``a signature made 
without actual, implied, or apparent authority'' and ``includes a 
forgery.'' UCC 1-201(41).
    \4\ The term ``bank'' as used in this notice and in Regulation 
CC (12 CFR 229.2(e)) includes a commercial bank, savings bank, 
savings and loan association, credit union, and a U.S. agency or 
branch of a foreign bank.
    \5\ The presenting bank warrants to the paying bank only that it 
has no knowledge of an unauthorized drawer's signature. See UCC 3-
417 and 4-208.
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    These provisions of the UCC reflect the long-standing rule set 
forth in Price v. Neal that the paying bank must bear the loss when a 
check it pays is not properly payable by virtue of the fact that the 
drawer did not authorize the item.\6\ The Price v. Neal rule reflects 
the assumption that the paying bank, rather than the depositary bank, 
is in the best position to judge whether the drawer's signature on a 
check is the authorized signature of the account-holder. By contrast, 
the depositary bank is arguably in a better position than the paying 
bank to inspect the check at the time of deposit and detect an 
alteration to the face of the check, to determine that the amount of 
the check is unusual for the depositary bank's customer, or to 
otherwise take responsibility for the items it accepts for deposit.
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    \6\ Price v. Neal, 97 Eng. Rep. 871 (K.B. 1762).

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[[Page 25540]]

III. Proposed Presumption of Alteration

    Regulation CC does not currently address whether a check should be 
presumed to be altered or forged in cases of doubt. For example, an 
unauthorized payee name could result from an alteration of the original 
check that the drawer issued, or from the creation of a forged check 
bearing the unauthorized payee name and an unauthorized/forged drawer's 
signature. Courts have reached opposite conclusions as to whether a 
paid, but fraudulent, check should be presumed to be altered or forged 
in the absence of evidence (such as the original check).\7\ Since the 
time of these decisions, the check collection system has become 
overwhelmingly electronic, and the number of instances in which the 
original paper check is available for inspection in such cases will be 
quite low.\8\ Unlike the 2006 court cases, where the paying bank 
received and destroyed the original check, in today's check environment 
the original check is typically truncated by the depositary bank or a 
collecting bank before it reaches the paying bank. In light of requests 
from members of the industry, the Board requested comment on the 
adoption of an evidentiary presumption in Regulation CC.\9\ 
Specifically, the Board requested comment on whether it should adopt an 
evidentiary presumption, and if yes, whether the check should be 
presumed to be altered or forged in cases of doubt.\10\ The Board also 
requested comment on whether banks are aware of or have information 
pertaining to whether forged checks are a more common method of 
committing fraud than altering the payee name or amount on the check.
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    \7\ See, e.g., Chevy Chase Bank v. Wachovia Bank, N.A., 208 Fed. 
App'x. 232, 235 (4th Cir. 2006) and Wachovia Bank, N.A. v. Foster 
Bancshares, Inc., 457 F.3d 619 (7th Cir. 2006).
    \8\ For example, by the beginning of 2017 the Federal Reserve 
Banks received over 99.99 percent of checks electronically from 
99.06 percent of routing numbers and presented over 99.99 percent of 
checks electronically to over 99.76 percent of routing numbers. As 
of the same time, the Federal Reserve Banks received 99.63 percent 
of returned checks electronically from over 99.37 percent of routing 
numbers and delivered 99.41 percent of returned checks 
electronically to 92.84 percent of routing numbers.
    \9\ Although the Board did not raise the issue, two commenters 
requested that the Board address the uncertainty caused by the 
divergent appellate court decisions in response to a 2011 proposed 
rulemaking. 76 FR 16862 (March 25, 2011). The Board describes these 
comments in greater detail as part of its 2014 proposal. 79 FR 6673, 
6703 (Feb. 4, 2014).
    \10\ The Board believes that the substance of the UCC's loss-
allocation framework for altered and forged checks, under which the 
depositary bank generally bears the loss for altered checks and the 
paying bank generally bears the loss for forged checks, continues to 
be appropriate in the current check-processing environment.
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    The Board received four comments concerning the adoption of an 
evidentiary presumption.\11\ All four, including a comment letter 
submitted by a group of institutions and trade associations, supported 
the adoption of an evidentiary presumption of alteration in the event 
that there is insufficient evidence to determine whether a particular 
check was altered or is a forged item. One commenter believed that a 
presumption of alteration (imposing the risk of loss on the depositary 
bank as described above) is appropriate in today's virtually all-
electronic environment. The commenter reasoned that in today's 
environment the vast majority of checks are truncated by the depositary 
banks or their customers, the depositary bank has the option of 
retaining the original check, and if the depositary bank presents a 
substitute check, the paying bank does not have the right to demand 
presentment of the original check.
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    \11\ The Board received an additional comment about the 
applicability of the UCC to alterations by persons other than the 
payee. The commenter did not address whether the Board should adopt 
an evidentiary presumption.
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    Based on these comments, the Board is proposing to adopt a 
presumption of alteration with respect to any dispute arising under 
federal or state law as to whether the dollar amount or the payee on a 
substitute check or electronic check has been altered or whether the 
substitute check or electronic check is derived from an original check 
that is a forgery. The Board requests comment on whether the 
presumption should also apply to a claim that the date was altered.
    Under the proposed rule, the presumption of alteration may be 
overcome by a preponderance of evidence that the substitute check or 
electronic check accurately represents the dollar amount and payee as 
authorized by the drawer, or that the substitute check or electronic 
check is derived from an original check that is a forgery. The proposed 
rule would also state that the presumption of alteration shall cease to 
apply if the original check is made available for examination by all 
parties involved in the dispute. The Board requests comment on whether 
the presumption of alteration should apply if the bank claiming the 
presumption received and destroyed the original check.
    The Board is also proposing accompanying commentary provisions to 
explain the operation of the rule, including clarification that the 
presumption does not alter the process by which a bank may seek to make 
a claim against another bank on a check that the bank alleges to be 
altered.

IV. Competitive Impact Analysis

    The Board conducts a competitive impact analysis when it considers 
an operational or legal change, if that change would have a direct and 
material adverse effect on the ability of other service providers to 
compete with the Federal Reserve in providing similar services due to 
legal differences or due to the Federal Reserve's dominant market 
position deriving from such legal differences. All operational or legal 
changes having a substantial effect on payments-system participants 
will be subject to a competitive-impact analysis, even if competitive 
effects are not apparent on the face of the proposal. If such legal 
differences exist, the Board will assess whether the same objectives 
could be achieved by a modified proposal with lesser competitive impact 
or, if not, whether the benefits of the proposal (such as contributing 
to payments-system efficiency or integrity or other Board objectives) 
outweigh the materially adverse effect on competition.\12\
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    \12\ Federal Reserve Regulatory Service, 7-145.2.
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    The Board does not believe that the proposed amendments to 
Regulation CC will have a direct and material adverse effect on the 
ability of other service providers to compete effectively with the 
Reserve Banks in providing similar services due to legal differences. 
The proposed amendments would apply to the Reserve Banks and private-
sector service providers alike and would not affect the competitive 
position of private-sector presenting banks vis-[agrave]-vis the 
Reserve Banks.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board may not conduct 
or sponsor, and a respondent is not required to respond to, an 
information collection unless it displays a valid Office of Management 
and Budget (OMB) control number. The Board reviewed the proposed rule 
under the authority delegated to the Board by the OMB and determined 
that it contains no collections of information under the PRA.\13\ 
Accordingly, there is no paperwork burden associated with the rule.
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    \13\ See 44 U.S.C. 3502(3).
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VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act (the ``RFA'') (5 U.S.C. 601 et seq.) 
requires

[[Page 25541]]

agencies either to provide an initial regulatory flexibility analysis 
with a proposed rule or to certify that the proposed rule will not have 
a significant economic impact on a substantial number of small 
entities. In accordance with section 3(a) of the RFA, the Board has 
reviewed the proposed regulation. In this case, the proposed rule would 
apply to all depository institutions. This Initial Regulatory 
Flexibility Analysis has been prepared in accordance with 5 U.S.C. 603 
in order for the Board to solicit comment on the effect of the proposal 
on small entities. The Board will, if necessary, conduct a final 
regulatory flexibility analysis after consideration of comments 
received during the public comment period.

1. Statement of the Need for, Objectives of, and Legal Basis for, the 
Proposed Rule

    The Board is proposing the foregoing amendments to Regulation CC 
pursuant to its authority under the EFA Act. The proposal addresses 
situations where there is a dispute as to whether a check has been 
altered or is a forgery, and the original paper check is not available 
for inspection. The check collection system has become overwhelmingly 
electronic, and the number of instances in which the original paper 
check will be available for inspection in such cases will be quite low. 
Under the UCC, the depositary bank typically bears the loss related to 
an altered check, whereas the paying bank bears the loss related to a 
forged check. The proposed rule would adopt a presumption of alteration 
with respect to any dispute as to whether the dollar amount or the 
payee on a substitute check or electronic check has been altered or 
whether the substitute check or electronic check is derived from an 
original check that is a forgery.

2. Small Entities Affected by the Proposed Rule

    The proposed rule would apply to all depository institutions 
regardless of their size.\14\ Pursuant to regulations issued by the 
Small Business Administration (13 CFR 121.201), a ``small banking 
organization'' includes a depository institution with $550 million or 
less in total assets. Based on call report data as of December 2016, 
there are approximately 10,185 depository institutions that have total 
domestic assets of $550 million or less and thus are considered small 
entities for purposes of the RFA.
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    \14\ The proposed rule would not impose costs on any small 
entities other than depository institutions.
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3. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    A presumption of alteration shifts the burden to the bank that 
warrants that a check has not been altered, which could be a depositary 
bank or collecting bank. In order to overcome the proposed presumption 
of alteration, a depositary bank or collecting bank must prove by a 
preponderance of evidence that either the substitute check or 
electronic check accurately represents the dollar amount and payee as 
authorized by the drawer, or that the substitute check or electronic 
check is derived from an original check that is a forgery. Under the 
proposed rule, the presumption of alteration shall cease to apply if 
the original check is made available for examination by all parties 
involved in the dispute.
    A depositary bank or collecting bank that destroys all original 
checks after truncation may incur additional risk, as it may not be 
able to overcome the presumption of alteration. The Board expects 
depositary banks and collecting banks to weigh the costs and benefits 
of destroying or retaining original checks, such as for large dollar 
amounts, so that the presumption of alteration will not apply.

4. Identification of Duplicative, Overlapping, or Conflicting Federal 
Rules

    As mentioned above, courts have reached opposite conclusions as to 
whether, under the Uniform Commercial Code, a paid, but fraudulent, 
check should be presumed to be altered or forged in the absence of 
evidence, such as the original check. The proposal would resolve that 
discrepancy under the conditions described above. The Board knows of no 
other duplicative, overlapping, to conflicting Federal rules related to 
this proposal.

5. Significant Alternatives to the Proposed Rule

    As discussed above, the Board requested comment as part of its 2014 
Regulation CC proposal on whether it should adopt an evidentiary 
presumption, and if so, whether the check should be presumed to be 
altered or forged in cases of doubt.\15\ All comments received 
supported the adoption of an evidentiary presumption of alteration. The 
Board welcomes comment on the impact of the proposed rule on small 
entities and any approaches, other than the proposed alternatives, that 
would reduce the burden on all entities, including small issuers.
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    \15\ 79 FR 6673, 6703 (Feb. 4, 2014).
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List of Subjects in 12 CFR Part 229

    Banks, Banking, Federal Reserve System, Reporting and recordkeeping 
requirements.

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR part 229 as follows:

PART 229--AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS 
(REGULATION CC)

0
1. The authority citation for part 229 continues to read as follows:

    Authority: 12 U.S.C. 4001-4010, 12 U.S.C. 5001-5018.

0
2. In Sec.  229.38, paragraph (i) is added to read as follows:
* * * * *

Subpart C--Collection of Checks

* * * * *


Sec.  229.38  Liability.

* * * * *
    (i) Presumption of Alteration. (1) Presumption. Subject to 
paragraph (i)(2), the presumption in this paragraph applies with 
respect to any dispute arising under federal or state law as to 
whether--
    (i) The dollar amount or the payee on a substitute check or 
electronic check has been altered or
    (ii) The substitute check or electronic check is derived from an 
original check that is a forgery.
    When such a dispute arises, there is a rebuttable presumption that 
the substitute check or electronic check contains an alteration of the 
dollar amount or the payee. The presumption of alteration may be 
overcome by proving by a preponderance of evidence that either the 
substitute check or electronic check accurately represents the dollar 
amount and payee as authorized by the drawer, or that the substitute 
check or electronic check is derived from an original check that is a 
forgery.
    (2) Effect of producing original check. If the original check made 
available for examination by all parties involved in the dispute, the 
presumption in paragraph (i)(1) shall no longer apply.
* * * * *
0
3. In Appendix E to part 229, under ``XXIV. Section 229.38 
Liabilities,'' add paragraph ``I. 229.38(i) Presumption of Alteration''
    The addition reads as follows:

[[Page 25542]]

Appendix E to Part 229--Commentary

* * * * *

XXIV. Section 229.38 Liability

* * * * *

I. 229.38(i) Presumption of Alteration

    1. This paragraph establishes an evidentiary presumption of 
alteration of a check when the original check has been converted to 
an image and only an electronic check or a substitute check is 
available for inspection. This provision does not alter the transfer 
and presentment warranties under the UCC that allocate liability 
among the parties to a check transaction with respect to an altered 
or forged item. The UCC or other applicable check law continues to 
apply with respect to other rights, duties, and obligations related 
to altered or forged checks.
    2. The presumption of alteration applies when the original check 
is unavailable for review by the banks in context of the dispute. If 
the original check is produced, through discovery or other means, 
and is made available for examination by all the parties, the 
presumption no longer applies. There is no presumption of alteration 
as between two banks that exchange an original check.

    By order of the Board of Governors of the Federal Reserve 
System, May 26, 2017.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2017-11380 Filed 6-1-17; 8:45 am]
BILLING CODE P