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Regulation
CC
Availability Of Funds And Collection Of Checks - Appendix E
XVII. Section 229.31 Returning Bank's Responsibility for Return
of Checks
A. 229.31(a) Return of Checks
1. The standards for return of checks
established by this section are similar to those for paying banks
in Sec. 229.30(a). This section requires a returning bank to return
a returned check expeditiously if it agrees to handle the returned
check for expeditious return under this paragraph. In effect,
the returning bank is an agent or subagent of the paying bank
and a subagent of the depositary bank for the purposes of returning
the check.
2. A returning bank agrees to handle
a returned check for expeditious return to the depositary bank
if it:
a. Publishes or distributes availability
schedules for the return of returned checks and accepts the returned
check for return;
b. Handles a returned check for return
that it did not handle for forward collection; or
c. Otherwise agrees to handle a returned
check for expeditious return.
3. Two-day/four-day test. As in the case
of a paying bank, a returning bank's return of a returned check
is expeditious if it meets either of two tests. Under the ``two-day/four-day''
test, the check must be returned so that it would normally be
received by the depositary bank by 4:00 p.m. either two or four
business days after the check was presented to the paying bank,
depending on whether or not the paying bank is located in the
same check processing region as the depositary bank. This is the
same test as the two-day/four-day test applicable to paying banks.
(See Commentary to Sec. 229.30(a).) While a returning bank will
not have first hand knowledge of the day on which a check was
presented to the paying bank, returning banks may, by agreement,
allocate with paying banks liability for late return based on
the delays caused by each. In effect, the two-day/four day test
protects all paying and returning banks that return checks from
claims that they failed to return a check expeditiously, where
the check is returned within the specified time following presentment
to the paying bank, or a later time as would result from unforeseen
delays.
4. Forward collection test.
a. The ``forward collection'' test is
similar to the forward collection test for paying banks. Under
this test, a returning bank must handle a returned check in the
same manner that a similarly situated collecting bank would handle
a check of similar size drawn on the depositary bank for forward
collection. A similarly situated bank is a bank (other than a
Federal Reserve Bank) that is of similar asset size and check
handling activity in the same community. A bank has similar check
handling activity if it handles a similar volume of checks for
forward collection as the forward collection volume of the returning
bank.
b. Under the forward collection
test, a returning bank must accept returned checks, including
both qualified and other returned checks (``raw returns''), at
approximately the same times and process them according to the
same general schedules as checks handled for forward collection.
Thus, a returning bank generally must process even raw returns
on an overnight basis, unless its time limit is extended by one
day to convert a raw return to a qualified returned check.
5. Cut-off hours. A returning bank may
establish earlier cut-off hours for receipt of returned checks
than for receipt of forward collection checks, but the cut-off
hour for returned checks may not be earlier than 2:00 p.m. The
returning bank also may set different sorting requirements for
returned checks than those applicable to other checks. Thus, a
returning bank may allow itself more processing time for returns
than for forward collection checks. All returned checks received
by a cut-off hour for returned checks must be processed and dispatched
by the returning bank by the time that it would dispatch forward
collection checks received at a corresponding forward collection
cut-off hour that provides for the same or faster availability
for checks destined for the same depositary banks.
6. Examples.
a. If a returning bank receives a returned
check by its cut-off hour for returned checks on Monday and the
depositary bank and the returning bank are participants in the
same clearinghouse, the returning bank should arrange to have
the returned check received by the depositary bank by Tuesday.
This would be the same day that it would deliver a forward collection
check drawn on the depositary bank and received by the returning
bank at a corresponding forward collection cut-off hour on Monday.
b. i. If a returning bank receives a
returned check, and the returning bank normally would collect
a forward collection check drawn on the depositary bank by sending
the forward collection check to a correspondent or a Federal Reserve
Bank by courier, the returning bank could send the returned check
in the same manner if the correspondent has agreed to handle returned
checks expeditiously under Sec. 229.31(a). The returning bank
would have to deliver the check by the correspondent's or Federal
Reserve Bank's cut-off hour for returned checks that corresponds
to its cut-off hour for forward collection checks drawn on the
depositary bank. A returning bank may take a day to convert a
check to a qualified returned check. Where the forward collection
checks are delivered by courier, mailing the returned checks would
not meet the duty established by this section for returning banks.
ii. A returning bank must return a check
to the depositary bank by courier or other means as fast as a
courier, if similarly situated returning banks use couriers to
deliver their forward collection checks to the depositary bank.
iii. For some depositary banks, no community
practice exists as to delivery of checks. For example, a credit
union whose customers use payable-through drafts normally does
not have checks presented to it because the drafts are normally
sent to the payable-through bank for collection. In these circumstances,
the community standard is established by taking into account the
dollar volume of the checks being sent to the depositary bank
and the location of the depositary bank, and determining whether
similarly situated banks normally would deliver forward collection
checks to the depositary bank, taking into account the particular
risks associated with returned checks. Where the community standard
does not require courier delivery, other means of delivery, including
mail, are acceptable.
7. Qualified returned checks.
a. The expeditious return requirement
for a returning bank in this regulation is more stringent in many
cases than the duty of a collecting bank to exercise ordinary
care under U.C.C. 4-202 in returning a check. A returning bank
is under a duty to act as expeditiously in returning a check as
it would in the forward collection of a check. Notwithstanding
its duty of expeditious return, its midnight deadline under U.C.C.
4-202 and Sec. 210.12(a) of Regulation J (12 CFR 210.12(a)), under
the forward collection test, a returning bank may take an extra
day to qualify a returned check. A qualified returned check will
be handled by subsequent returning banks more efficiently than
a raw return. This paragraph gives a returning bank an extra business
day beyond the time that would otherwise be required to return
the returned check to convert a returned check to a qualified
returned check. The qualified returned check must include the
routing number of the depositary bank, the amount of the check,
and a return identifier encoded on the check in magnetic ink.
b. If the returning bank is sending the
returned check directly to the depositary bank, this extra day
is not available because preparing a qualified returned check
will not expedite handling by other banks. If the returning bank
makes an encoding error in creating a qualified returned check,
it may be liable under Sec. 229.38 for losses caused by any negligence
or under Sec. 229.34(c)(3) for breach of an encoding warranty.
The returning bank would not lose the one-day extension available
to it for creating a qualified returned check because of an encoding
error.
8. Routing of returned check.
a. Under Sec. 229.31(a), the returning
bank is authorized to route the returned check in a variety of
ways:
i. It may send the returned check directly
to the depositary bank by courier or other expeditious means of
delivery; or
ii. It may send the returned check to
any returning bank agreeing to handle the returned check for expeditious
return to the depositary bank under this section regardless of
whether or not the returning bank handled the check for forward
collection.
b. If the returning bank elects to send
the returned check directly to the depositary bank, it is not
required to send the check to the branch of the depositary bank
that first handled the check. The returned check may be sent to
the depositary bank at any location permitted under Sec. 229.32(a).
9. Responsibilities of returning
bank. In meeting the requirements of this section, the returning
bank is responsible for its own actions, but not those of the
paying bank, other returning banks, or the depositary bank. (See
U.C.C. 4-202(c) regarding the responsibility of collecting banks.)
For example, if the paying bank has delayed the start of the return
process, but the returning bank acts in a timely manner, the returning
bank may satisfy the requirements of this section even if the
delayed return results in a loss to the depositary bank. (See
Sec. 229.38.) A returning bank must handle a notice in lieu of
return as expeditiously as a returned check.
10. U.C.C. sections affected. This paragraph
directly affects the following provisions of the U.C.C., and may
affect other sections or provisions:
a. Section 4-202(b), in that time limits
required by that section may be affected by the additional requirement
to make an expeditious return.
b. Section 4-214(a), in that settlement
for returned checks is made under Sec. 229.31(c) and not by charge-back
of provisional credit, and in that the time limits may be affected
by the additional requirement to make an expeditious return.
B. 229.31(b) Unidentifiable Depositary Bank
1. This section is similar to Sec. 229.30(b),
but applies to returning banks instead of paying banks. In some
cases a returning bank will be unable to identify the depositary
bank with respect to a check. Returning banks agreeing to handle
checks for return to depositary banks under Sec. 229.31(a) are
expected to be expert in identifying depositary bank indorsements.
In the limited cases where the returning bank cannot identify
the depositary bank, the returning bank may send the returned
check to a returning bank that agrees to handle the returned check
for expeditious return under Sec. 229.31(a), or it may send the
returned check to a bank that handled the check for forward collection,
even if that bank does not agree to handle the returned check
expeditiously under Sec. 229.31(a).
2. If the returning bank itself handled
the check for forward collection, it may send the returned check
to a collecting bank that was prior to it in the forward collection
process, which will be better able to identify the depositary
bank. If there are no prior collecting banks, the returning bank
must research the collection of the check and identify the depositary
bank. As in the case of paying banks under Sec. 229.30(b), a returning
bank's sending of a check to a bank that handled the check for
forward collection under Sec. 229.31(b) is not subject to the
expeditious return requirements of Sec. 229.31(a).
3. The returning bank's return of a check
under this paragraph is subject to the midnight deadline under
U.C.C. 4-202(b). (See definition of returning bank in Sec. 229.2(cc).)
4. Where a returning bank receives a
check that it does not agree to handle expeditiously under Sec.
229.31(a), such as a check sent to it under Sec. 229.30(b), but
the returning bank is able to identify the depositary bank, the
returning bank must thereafter return the check expeditiously
to the depositary bank. The returning bank returns a check expeditiously
under this paragraph if it returns the check by the same means
it would use to return a check drawn on it to the depositary bank
or by other reasonably prompt means.
5. As in the case of a paying bank returning
a check under Sec. 229.30(b), a returning bank returning a check
under this paragraph to a bank that has not agreed to handle the
check expeditiously must advise that bank that it is unable to
identify the depositary bank. This advice must be conspicuous,
such as a stamp on each check for which the depositary bank is
unknown if such checks are commingled with other returned checks,
or, if such checks are sent in a separate cash letter, by one
notice on the cash letter. The returned check may not be prepared
for automated return.
C. 229.31(c) Settlement
1. Under the U.C.C., a collecting bank
receives settlement for a check when it is presented to the paying
bank. The paying bank may recover the settlement when the paying
bank returns the check to the presenting bank. Under this regulation,
however, the paying bank may return the check directly to the
depositary bank or through returning banks that did not handle
the check for forward collection. On these more efficient return
paths, the paying bank does not recover the settlement made to
the presenting bank. Thus, this paragraph requires the returning
bank to settle for a returned check (either with the paying bank
or another returning bank) in the same way that it would settle
for a similar check for forward collection. To achieve uniformity,
this paragraph applies even if the returning bank handled the
check for forward collection.
2. Any returning bank, including one
that handled the check for forward collection, may provide availability
for returned checks pursuant to an availability schedule as it
does for forward collection checks. These settlements by returning
banks, as well as settlements between banks made during the forward
collection of a check, are considered final when made subject
to any deferment of availability. (See Sec. 229.36(d) and Commentary
to Sec. 229.35(b).)
3. A returning bank may vary the
settlement method it uses by agreement with paying banks or other
returning banks. Special rules apply in the case of insolvency
of banks. (See Sec. 229.39.) If payment cannot be obtained from
a depositary or returning bank because of its insolvency or otherwise,
recovery can be had by returning, paying, and collecting banks
from prior banks on this basis of the liability of prior banks
under Sec. 229.35(b).
4. This paragraph affects U.C.C. 4-214(a)
in that a paying or collecting bank does not ordinarily have a
right to charge back against the bank from which it received the
returned check, although it is entitled to settlement if it returns
the returned check to that bank, and may affect other sections
or provisions. Under Sec. 229.36(d), a bank collecting a check
remains liable to prior collecting banks and the depositary bank's
customer under the U.C.C.
D. 229.31(d) Charges
1. This paragraph permits any returning
bank, even one that handled the check for forward collection,
to impose a fee on the paying bank or other returning bank for
its service in handling a returned check. Where a claim is made
under Sec. 229.35(b), the bank on which the claim is made is not
authorized by this paragraph to impose a charge for taking up
a check. This paragraph preempts state laws to the extent that
these laws prevent returning banks from charging fees for handling
returned checks.
E. 229.31(e) Depositary Bank Without Accounts
1. This paragraph is similar to Sec.
229.30(e) and relieves a returning bank of its obligation to make
expeditious return to a depositary bank that does not maintain
any accounts. (See the Commentary to Sec. 229.30(e).)
F. 229.31(f) Notice in Lieu of Return
1. This paragraph is similar to Sec.
229.30(f) and authorizes a returning bank to originate a notice
in lieu of return if the returned check is unavailable for return.
Notice in lieu of return is permitted only when a bank does not
have and cannot obtain possession of the check or must retain
possession of the check for protest. A check is not unavailable
for return if it is merely difficult to retrieve from a filing
system or from storage by a keeper of checks in a truncation system.
(See the Commentary to Sec. 229.30(f).)
G. 229.31(g) Reliance on Routing Number
1. This paragraph is similar to Sec.
229.30(g) and permits a returning bank to rely on routing numbers
appearing on a returned check such as routing numbers in the depositary
bank's indorsement or on qualified returned checks. (See the Commentary
to Sec. 229.30(g).)
Subpart A - General
Subpart B -
Availability of Funds and Disclosure of Funds Availability Policies
Subpart C -
Collection of Checks
Appendices A
& B
Appendices C
& D
Appendix F
Credit
And Banking Laws Menu
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