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Regulation
CC
Availability Of Funds And Collection Of Checks - Appendix E
XXI. Section 229.35 Indorsements
A. 229.35(a) Indorsement Standards
1. This section and Appendix D require
banks to use a standard form of indorsement when indorsing checks
during the forward collection and return process. The standard
provides for indorsements by all collecting and returning banks,
plus a unique standard for depositary bank indorsements. It is
designed to facilitate the identification of the depositary bank
and the prompt return of checks. The regulation places a duty
on banks to ensure that their indorsements are legible. The indorsement
standard specifies the information each indorsement must contain
and its location and ink color.
2. The indorsement standard requires
that the nine-digit routing number of the depositary bank be wholly
contained in an area on the back of the check from 3.0 inches
from the leading edge to 1.5 inches from the trailing edge of
the check. This permits banks to use encoding equipment that measures
from either the leading or trailing edge of the check to place
indorsements in this area. The standard does not require that
the entire depositary bank indorsement be contained within the
specified area, but checks will be handled most efficiently if
depositary banks place as much information as possible within
the designated area to ensure that the information is protected
from being overstamped by subsequent indorsements. The location
requirement for subsequent collecting bank indorsements (not including
returning bank indorsements) limits these indorsements to the
area on the back of the check from the leading edge to 3.0 inches
from the leading edge of the check. The area from the trailing
edge of the check to 1.5 inches from the trailing edge is commonly
used for the payee indorsement.
3. The standard requires depositary banks
to use either purple or black ink. The Board encourages depositary
banks to indorse checks in purple ink where possible, because
use of a unique ink color will facilitate the speedy identification
of the depositary bank. Black ink, however, may be used when use
of purple ink is not feasible, such as where a bank uses the same
equipment to apply both depositary bank and subsequent collecting
bank indorsements, and the equipment has only one source of ink.
4. The standard requires subsequent collecting
banks to use an ink color other than purple for their indorsements.
The standard also requires the depositary bank's indorsement to
include its nine-digit routing number set off by arrows, the bank's
name and location, and the indorsement date, and permits the indorsement
to include other identifying information.
5. The standard does not include the
fractional routing number for depositary banks; however, a bank
may include its fractional routing number or repeat its nine-digit
routing number in its indorsement. If a depositary bank includes
its routing number in its indorsement more than once, paying and
returning banks will be able to identify the depositary bank more
readily. Depositary banks should not include information that
can be confused with required information. For example, a nine-digit
zip code could be confused with the nine-digit routing number.
6. A depositary bank is not required
to place a street address in its indorsement; however, a bank
may want to put an address in its indorsement in order to limit
the number of locations at which it must accept returned checks.
In instances where this address is not consistent with the routing
number in the indorsement, the depositary bank is required to
accept returned checks at a branch or head office consistent with
the routing number. Banks should note, however, that Sec. 229.32
requires a depositary bank to accept returned checks at the location(s)
it accepts forward collection checks. The inclusion of a depositary
bank's telephone number where it would receive notices of large-dollar
returns in its indorsements is optional.
7. Under the U.C.C., a specific guarantee
of prior indorsement is not necessary. (See U.C.C. 4-207(a) and
4-208(a).) Use of guarantee language in indorsements, such as
``P.E.G.'' (``prior endorsements guaranteed''), may result in
reducing the type size used in bank indorsements, thereby making
them more difficult to read. Use of this language may make it
more difficult for other banks to identify the depositary bank.
Subsequent collecting bank indorsements may not include this language.
8. The standard for returning banks requires
a returning bank to apply an indorsement that avoids the area
on the back of the check from 3.0 inches from the leading edge
of the check to the trailing edge--the area reserved for the payee
and depositary bank indorsements. Returning bank indorsements
may differ from subsequent collecting bank indorsements. The use
of various methods to process returns using a variety of equipment
also may cause returning bank indorsements to vary substantially
in form, content, and placement on the check. Thus, a returning
bank indorsement may be on the face of the check or on the back
of the check. A returning bank indorsement may not be in purple
ink. No content requirements have been adopted for the returning
bank indorsement.
9. If the bank maintaining the account
into which a check is deposited agrees with another bank (a correspondent,
ATM operator, or lock box operator) to have the other bank accept
returns and notices of nonpayment for the bank of account, the
indorsement placed on the check as the depositary bank indorsement
may be the indorsement of the bank that acts as correspondent,
ATM operator, or lock box operator as provided in paragraph (d)
of this section.
10. The backs of many checks bear pre-printed
information or blacked out areas for various reasons. For example,
some checks are printed with a carbon band across the back that
allows the transfer of information from the check to a ledger
with one writing. Also, contracts or loan agreements are printed
on certain checks. Other checks that are mailed to recipients
may contain areas on the back that are blacked out so that they
may not be read through the mailer. On the deposit side, the payee
of the check may place its indorsement or information identifying
the drawer of the check in the area specified for the depositary
bank indorsement, thus making the depositary bank indorsement
unreadable.
11. The indorsement standard does not
prohibit the use of a carbon band or other printed or written
matter on the backs of checks and does not require banks to avoid
placing their indorsements in these areas. Nevertheless, checks
will be handled more efficiently if depositary banks design indorsement
stamps so that the nine-digit routing number avoids the carbon
band area. Indorsing parties other than banks, e.g., corporations,
will benefit from the faster return of checks if they protect
the identifiability and legibility of the depositary bank indorsement
by staying clear of the area reserved for the depositary bank
indorsement.
12. Section 229.38(d) allocates responsibility
for loss resulting from a delay in return of a check due to indorsements
that are unreadable because of material on the back of the check.
The depositary bank is responsible for a loss resulting from a
delay in return caused by the condition of the check arising after
its issuance until its acceptance by the depositary bank that
made the depositary bank's indorsement illegible. The paying bank
is responsible for loss resulting from a delay in return caused
by indorsements that are not readable because of other material
on the back of the check at the time that it was issued. Depositary
and paying banks may shift these risks to their customers by agreement.
13. The standard does not require the
paying bank to indorse the check; however, if a paying bank does
indorse a check that is returned, it should follow the indorsement
standard for returning banks. The standard requires collecting
and returning banks to indorse the check for tracing purposes.
B. 229.35(b) Liability of Bank Handling Check
1. When a check is sent for forward
collection, the collection process results in a chain of indorsements
extending from the depositary bank through any subsequent collecting
banks to the paying bank. This section extends the indorsement
chain through the paying bank to the returning banks, and would
permit each bank to recover from any prior indorser if the claimant
bank does not receive payment for the check from a subsequent
bank in the collection or return chain. For example, if a returning
bank returned a check to an insolvent depositary bank, and did
not receive the full amount of the check from the failed bank,
the returning bank could obtain the unrecovered amount of the
check from any bank prior to it in the collection and return chain
including the paying bank. Because each bank in the collection
and return chain could recover from a prior bank, any loss would
fall on the first collecting bank that received the check from
the depositary bank. To avoid circuity of actions, the returning
bank could recover directly from the first collecting bank. Under
the U.C.C., the first collecting bank might ultimately recover
from the depositary bank's customer or from the other parties
on the check.
2. Where a check is returned through
the same banks used for the forward collection of the check, priority
during the forward collection process controls over priority in
the return process for the purpose of determining prior and subsequent
banks under this regulation.
3. Where a returning bank is insolvent
and fails to pay the paying bank or a prior returning bank for
a returned check, Sec. 229.39(a) requires the receiver of the
failed bank to return the check to the bank that transferred the
check to the failed bank. That bank then either could continue
the return to the depositary bank or recover based on this paragraph.
Where the paying bank is insolvent, and fails to pay the collecting
bank, the collecting bank also could recover from a prior collecting
bank under this paragraph, and the bank from which it recovered
could in turn recover from its prior collecting bank until the
loss settled on the depositary bank (which could recover from
its customer).
4. A bank is not required to make a claim
against an insolvent bank before exercising its right to recovery
under this paragraph. Recovery may be made by charge-back or by
other means. This right of recovery also is permitted even where
nonpayment of the check is the result of the claiming bank's negligence
such as failure to make expeditious return, but the claiming bank
remains liable for its negligence under Sec. 229.38.
5. This liability is imposed on a bank
handling a check for collection or return regardless of whether
the bank's indorsement appears on the check. Notice must be sent
under this paragraph to a prior bank from which recovery is sought
reasonably promptly after a bank learns that it did not receive
payment from another bank, and learns the identity of the prior
bank. Written notice reasonably identifying the check and the
basis for recovery is sufficient if the check is not available.
Receipt of notice by the bank against which the claim is made
is not a precondition to recovery by charge-back or other means;
however, a bank may be liable for negligence for failure to provide
timely notice. A paying or returning bank also may recover from
a prior collecting bank as provided in Secs. 229.30(b) and 229.31(b).
This provision is not a substitute for a paying or returning bank
making expeditious return under Secs. 229.30(a) or 229.31(b).
This paragraph does not affect a paying bank's accountability
for a check under U.C.C. 4-215(a) and 4-302. Nor does this paragraph
affect a collecting bank's accountability under U.C.C. 4-213 and
4-215(d). A collecting bank becomes accountable upon receipt of
final settlement as provided in the foregoing U.C.C. sections.
The term final settlement in Secs. 229.31 (c), 229.32 (b), and
229.36(d) is intended to be consistent with the use of the term
final settlement in the U.C.C. (e.g., U.C.C. 4-213, 4-214, and
4-215). (See also Sec. 229.2(cc) and Commentary.)
6. This paragraph also provides that
a bank may have the rights of a holder based on the handling of
the check for collection or return. A bank may become a holder
or a holder in due course regardless of whether prior banks have
complied with the indorsement standard in Sec. 229.35(a) and Appendix
D.
7. This paragraph affects the following
provisions of the U.C.C., and may affect other provisions:
a. Section 4-214(a), in that the right
to recovery is not based on provisional settlement, and recovery
may be had from any prior bank. Section 4-214(a) would continue
to permit a depositary bank to recover a provisional settlement
from its customer. (See Sec. 229.33(d).)
b. Section 3-415 and related provisions
(such as section 3-503), in that such provisions would not apply
as between banks, or as between the depositary bank and its customer.
C. 229.35(c) Indorsement by Bank
1. This section protects the rights
of a customer depositing a check in a bank without requiring the
words ``pay any bank,'' as required by the U.C.C. (See U.C.C.
4-201(b).) Use of this language in a depositary bank's indorsement
will make it more difficult for other banks to identify the depositary
bank. The indorsement standard in Appendix D prohibits such material
in subsequent collecting bank indorsements. The existence of a
bank indorsement provides notice of the restrictive indorsement
without any additional words.
D. 229.35(d) Indorsement for Depositary Bank
1. This section permits a depositary
bank to arrange with another bank to indorse checks. This practice
may occur when a correspondent indorses for a respondent, or when
the bank servicing an ATM or lock box indorses for the bank maintaining
the account in which the check is deposited--i.e., the depositary
bank. If the indorsing bank applies the depositary bank's indorsement,
checks will be returned to the depositary bank. If the indorsing
bank does not apply the depositary bank's indorsement, by agreement
with the depositary bank it may apply its own indorsement as the
depositary bank indorsement. In that case, the depositary bank's
own indorsement on the check (if any) should avoid the location
reserved for the depositary bank. The actual depositary bank remains
responsible for the availability and other requirements of Subpart
B, but the bank indorsing as depositary bank is considered the
depositary bank for purposes of Subpart C. The check will be returned,
and notice of nonpayment will be given, to the bank indorsing
as depositary bank.
2. Because the depositary bank for Subpart
B purposes will desire prompt notice of nonpayment, its arrangement
with the indorsing bank should provide for prompt notice of nonpayment.
The bank indorsing as depositary bank may require the depositary
bank to agree to take up the check if the check is not paid even
if the depositary bank's indorsement does not appear on the check
and it did not handle the check. The arrangement between the banks
may constitute an agreement varying the effect of provisions of
Subpart C under Sec. 229.37.
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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