Regulation CC - Are You Ready For The Change

By : Marnie Thorp

May 10, 2018 12:00 PM

Among the many significant changes and challenges the banking industry is set to encounter in 2018, one that could prove particularly important is the impending reform in the US of Regulation CC (Availability of Funds and Collection of Checks).


The change to Regulation CC is a significant development that financial institutions (FIs) need to be aware of and prepared for.


Regulation CC: What it is and how it is changing


Regulation CC is a mechanism used in the US to enforce various rules and practices related to the processing of check payments.


One part of the regulation implements the funds availability and disclosure provisions of the Expedited Funds Availability Act (EFAA). US Congress passed the EFAA in 1987 to establish maximum periods for which banks are permitted to hold checks deposited by their customers.


Another function of Regulation CC is to clarify rules designed to expedite the return of unpaid checks, reducing the risk of banks making funds from check deposits available for withdrawal before confirming whether the check has been returned unpaid.


Furthermore, Regulation CC implements the federal law known as Check 21, which was passed by Congress in 2003 to reduce legal impediments to the electronic processing of checks. Check 21 has made a big contribution to the country's interbank check-collection processes becoming almost entirely electronic.


In short, Regulation CC has an important role to play in the payments ecosystem in the US, and on July 1, 2018, it will undergo some significant changes.


The alterations will affect subparts of the regulation that pertain to enforcement authority; rules designed to speed up the collection and return of checks, and the use of substitute checks for electronic processing. The reforms have been designed to establish a framework for electronic check collection and return, and to establish a consistent warranty chain, regardless of the check's form.


Furthermore, the amendments will aim to incentivize electronic presentment and return by updating expeditious return and notice of non-payment requirements.


The Federal Reserve Board of Governors said the changes were designed to "reflect the evolution of the nation's check collection system from one that is largely paper-based to one that is virtually all electronic".

It's important that FIs are aware of these forthcoming adjustments and do their research on how the new Regulation CC could affect their business.


The global payments ecosystem may be more diverse and evolving more rapidly than ever before, but it should not be forgotten that checks still have a role to play in this space.


Specific implications for FIs


The forthcoming changes to Regulation CC will bring about a number of significant implications for FIs, most notably in relation to new indemnities for duplicate presentment of checks and exceptions where a restrictive indorsement is present.


These changes will provide indemnities for FIs that accept an original paper check that is subsequently returned unpaid because it was previously accepted via remote deposit. The reforms also establish restrictive indorsements 'consistent with the means of deposit', as an exception to this indemnity. The reforms do not, however, mandate the presence of a restrictive indorsement on checks deposited either electronically or physically.


FIs that want to help protect against indemnities should only accept remotely deposited checks that bear a restrictive indorsement consistent with the means of deposit, a process that can be made easier with the support of a dedicated solution for remote deposit capture.


In the desktop channel, this level of protection can be achieved by requiring all checks to be scanned using a device that can apply a physical indorsement to the item. For mobile deposits, FIs could elect to only accept deposits if the necessary indorsement can be detected. One potential drawback of this approach is an increase in false positives, but this can be mitigated by flagging items that require attention for back-office review prior to clearing, rather than rejecting them outright. 


Where physical deposits in branches and at ATMs are concerned, FIs can better ensure they are indemnified for checks that are returned unpaid because of previous acceptance via Remote Deposit Capture for Consumers or for Businesses by not accepting items featuring restrictive indorsements inconsistent with the means of deposit. Automation of this task represents a big technical challenge, meaning human expertise is still required for effective detection of these items.


As the changes to Regulation CC come into effect, there will be a varied approach in the industry.  Some FIs may determine that the potential negative implications to their business goals outweigh the risk of indemnification due to duplicate presentment, and choose to mitigate the risks via alternate approaches (e.g. updates to terms of service) or not at all. Ultimately, individual FIs will need to work with their internal risk groups to determine the most effective actions for their organization, based on their unique business objectives and risk profile.


Marnie Thorp

Marketing Manager, NCR Payments

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For over 12 of her past 30+ year career, Marnie has developed many successful marketing initiatives helping drive payment and imaging technologies including remote deposit capture for the financial services industry worldwide. Based in Waterloo, Canada, Marnie is responsible for the marketing of NCR Payments solutions.