Regulation CC and Remote Deposit Capture

Introduction

What are the requirements now regarding remote deposit capture items under Regulation CC?

Response Summary

Remote deposit capture (“RDC”) items are now covered by the umbrella of Regulation CC availability rules. In addition, an indemnity would be provided by a bank that accepted a check through RDC to a bank that accepted the original check for deposit, in the event the bank that accepted the original check incurred a loss because the check had already been paid. A bank accepting deposits by RDC can protect itself by requiring checks deposited by RDC to have a restrictive indorsement (e.g., “For mobile deposit only to [name of bank], [signature of depositor]”). It can also, by agreement, allocate liability to its customer for loss incurred by the subsequent deposit of the original check.

Response Detail

The funds availability requirements of Regulation CC are determined by when a deposit is received by the bank. Under Section 229.19(a) of the regulation, a deposit is made when it is received by a staffed facility, ATM, or contractual branch, when it is removed from a night deposit and made available for processing by the institution, or when funds are removed from an ATM that is not within 50 feet of the premises of the bank.

Deposits are made through “remote deposit capture” when the depositor sends the depository bank electronic information about a check, such as a photographic image, which the bank uses to create an electronic check or substitute check for collection. Prior to July 1, 2018, deposits made by RDC were not considered to have been made at any of the locations described by Regulation CC and, thus, were not covered by the regulation. Consequently, the availability of such items had to be established by the terms of the agreement between a bank and its customers.

Effective July 1, 2018, electronic checks and electronic returned checks are to be treated as though they were checks or returned checks, except where “paper check” or “paper returned check” is specified by the regulation. 12 CFR §229.30(a). This means that RDC items now fall under the umbrella of Regulation CC funds availability rules.

In addition to warranty rules for electronic items, new indemnity rules have been adopted with respect to deposits made by RDC. Since the depositary bank’s customer retains the original check, that customer might, intentionally or mistakenly, deposit the original check in another depositary bank. The depositary bank that accepts the original check, in turn, may make funds available to the customer before it learns that the check is being returned unpaid and, in some cases, may be unable to recover the funds from its customer.

The indemnity would be provided by a depositary bank that:

• Is a “truncating bank” under Regulation CC because it accepts deposit of an electronic image or other electronic information related to an original check
• Does not receive the original check
• Receives settlement or other consideration for an electronic check or substitute check related to the original check
• Does not receive the check returned unpaid. 12 CFR §229.34(f).

The indemnity will run to a depositary bank that accepts the original check for deposit for that depositary bank’s losses due to the check having already been paid.  Damages shall not exceed the consideration received by the bank plus interest compensation and expenses related to the check or returned check, if any. 12 CFR §229.34(h).

A depositary bank that accepted the original check for deposit is not allowed to make an indemnity claim if the original check it accepted for deposit bore a restrictive indorsement inconsistent with the means of deposit. 12 CFR §229.34(f)(3). Under the Uniform Commercial Code, a restrictive indorsement must have the name of the transferee. UCC 3-206. This means that, to protect itself against indemnification claims, a bank accepting deposits by RDC should require each check deposited by RDC to have an indorsement similar to the following:

For mobile deposit only to [name of bank], [signature of depositor]

A bank accepting deposits by RDC may, by agreement with the customer, allocate liability to its customer for loss incurred from the subsequent deposit of the original check. Appendix E to Part 229 – Commentary, G. 229.34(f) Remote Deposit Capture Indemnity – 3.

If a bank is sued for indemnity, it may give a prior bank in the collection or return chain written notice of the litigation, and the bank notified may then provide similar notice to any other prior bank. If the notice states that the bank notified may come in and defend and that failure to do so will bind the bank notified in an action later brought by the bank giving the notice as to any determination of fact common to the two litigations, the bank notified is so bound unless after seasonable receipt of the notice the bank notified does come in and defend. 12 CFR §229.34(j)

Unless a claimant provides notice of a claim for breach of warranty or for indemnity under this section to the bank that made the indemnification within 30 days after the claimant has reason to know of the breach, or facts and circumstances giving rise to the indemnity and the identity of the indemnifying bank, the indemnifying bank is discharged to the extent of any loss caused by the delay in giving notice of the claim. 12 CFR §229.34(k).

This entry was posted on Monday, July 16th, 2018 at 6:00 am.