[Federal Register Volume 69, Number 207 (Wednesday, October 27, 2004)]
[Rules and Regulations]
[Pages 62553-62561]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-24049]



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Rules and Regulations
                                                Federal Register
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Federal Register / Vol. 69, No. 207 / Wednesday, October 27, 2004 / 
Rules and Regulations

[[Page 62553]]



FEDERAL RESERVE SYSTEM

12 CFR Part 210

[Regulation J; Docket No. R-1202]


Collection of Checks and Other Items by Federal Reserve Banks and 
Funds Transfers Through Fedwire

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board of Governors is publishing final amendments to 
Regulation J to provide for the rights and obligations of banks and 
Reserve Banks relating to electronic items handled by Reserve Banks. 
These amendments ensure that Regulation J covers the electronic check 
processing service options that the Reserve Banks will offer when the 
Check Clearing for the 21st Century Act takes effect on October 28, 
2004. The final amendments also clarify some existing provisions of 
Regulation J.

DATES: This rule is effective on October 28, 2004.

FOR FURTHER INFORMATION CONTACT: Adrianne G. Threatt, Counsel (202-452-
3554), Legal Division; or Jack K. Walton, II, Assistant Director (202-
452-2660), or Joseph P. Baressi, 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.

SUPPLEMENTARY INFORMATION:

Background

    Regulation J governs the collection of checks and other items by 
the Reserve Banks. Under existing Regulation J, the term ``item'' is 
understood to mean a negotiable instrument in paper form. Regulation J 
includes the warranties and indemnities that senders and Reserve Banks 
give for items that are collected or returned through the Federal 
Reserve Banks. Regulation J also describes the Reserve Banks' security 
interest in the assets of banks for which they collect items, as well 
as the amounts and methods by which the Reserve Banks may recover for 
their losses associated with collection and return of items. Regulation 
J authorizes the Reserve Banks to issue operating circulars governing 
the details of the collection of checks and other items and provides 
that such operating circulars have binding effect on all persons 
interested in an item handled by a Reserve Bank. Although the Reserve 
Banks in some cases handle items electronically today, the rights and 
obligations associated with electronic items are not set forth in 
Regulation J but rather are addressed by the Reserve Banks' Operating 
Circular No. 3, ``Collection of Cash Items and Returned Checks'' (OC 
3).
    The Check 21 Act and the Board's implementing amendments, contained 
in a new subpart D of Regulation CC, take effect on October 28, 
2004.\1\ These provisions are designed to facilitate banks' ability to 
process checks electronically. Today, a bank that accepts a check for 
collection must collect the original paper check unless the bank to 
which it sends the check has agreed to receive the check 
electronically. It is difficult, if not impossible, for a bank to 
obtain electronic check exchange agreements with all other banks to 
which it sends checks. If the paying bank demands presentment of the 
original check, the banks in the collection process for that check must 
process the original check even if their agreements with one another 
would allow them to handle the check electronically among themselves. 
The Check 21 Act addresses this inefficiency by allowing banks to 
create a new negotiable instrument called a ``substitute check'' that, 
when properly prepared, is the legal equivalent of the original check. 
Under the Check 21 Act, banks can remove the original check from the 
collection process, handle the check electronically by agreement, and 
later create a legally equivalent substitute check when and where an 
original check is required.
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    \1\ See 69 FR 47290, Aug. 4, 2004. The Reserve Banks will amend 
OC 3 to address the details of their new check processing services 
following the Board's adoption of final amendments to Regulation J.
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    A bank that creates a substitute check is known as the 
``reconverting bank.'' The reconverting bank makes two new warranties 
and an indemnity designed to protect substitute check recipients 
against losses associated with the check substitution process. These 
warranties are made, in turn, by each bank that subsequently handles 
the substitute check, whether it remains in paper form or is converted 
to electronic form.\2\ Under this chain of warranties and indemnities, 
losses generally will be borne under the Check 21 Act by the 
reconverting bank, although the Act contains comparative negligence 
provisions to protect the reconverting bank from losses attributable to 
another person's fault.
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    \2\ Regulation CC provides that the warranties and indemnity 
flow with the transfer, presentment, or return of a substitute check 
``or a paper or electronic representation of a substitute check.'' 
In this preamble, the term ``substitute check'' includes a paper or 
electronic representation of that substitute check, unless the 
context indicates that the reference is to the actual substitute 
check.
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    The Check 21 Act allocates losses only among parties that handle a 
substitute check. However, it is possible that the problem giving rise 
to liability under the Check 21 Act was the fault of the bank that sent 
electronic information derived directly from the original check to the 
reconverting bank. For example, the bank that converted the original 
check to electronic form and sent it to the reconverting bank might 
have taken a poor image of the original check, which would preclude the 
reconverting bank from creating a legally equivalent substitute check 
and cause it to breach a substitute check warranty. The Check 21 Act 
does not by its terms give the reconverting bank recourse against its 
sender in that case. However, the reconverting bank may, by agreement, 
further allocate losses that it incurs under the Check 21 Act. For 
example, a bank that plans to create substitute checks could require 
the bank from which it electronically receives the original check to 
warrant the accuracy of the image of the original check.
    After the Check 21 Act takes effect on October 28, 2004, the 
Reserve Banks will offer a wider variety of electronic check processing 
services, including accepting items in electronic form for collection 
and return. In some cases, an electronic item received by a Reserve

[[Page 62554]]

Bank will be an electronic representation of a substitute check for 
which the Reserve Banks will receive Check 21 Act warranty and 
indemnity protections from the sender and give those protections to 
subsequent transferees. However, the Reserve Banks anticipate that most 
of the items that they will receive in electronic form will be derived 
directly from the original check and thus will not be subject to the 
substitute check warranties and indemnity. (Unless specifically 
indicated otherwise, in the remainder of this preamble the term 
``electronic item'' refers to an electronic item derived directly from 
the original check and does not refer to an electronic representation 
of a substitute check.) A Reserve Bank in some cases will use an 
electronic item to create a substitute check for which it must make the 
Check 21 Act warranties and indemnity. In other cases, the Reserve Bank 
may transfer or present the electronic item to a subsequent party that 
creates a substitute check.

Overview of Proposed Rule

    The Board in June 2004 published proposed amendments to subpart A 
of Regulation J that were designed primarily to bring the Reserve 
Banks' handling of electronic items within the coverage of Regulation 
J, acknowledge the requirements of Regulation CC for substitute checks, 
and add new warranties and an indemnity that would apply when a sender 
sends an electronic item that is not subject to subpart D Regulation 
CC.\3\ The proposed supplemental warranties and indemnity were intended 
to allow a recipient of an electronic item to pass back subsequent 
Check 21-related liability to the sender of that item where 
appropriate. The proposed supplemental warranties and indemnity 
therefore closely tracked the warranties and indemnity in subpart D of 
Regulation CC.
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    \3\ 69 FR 34086, June 18, 2004.
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    The other proposed amendments generally were technical in nature, 
such as supplementing existing definitions in Regulation J to 
correspond to definitional changes in Regulation CC and reorganizing 
and revising some existing regulatory text for greater clarity.

Overview of Comments on the Proposed Rule

    The Board received comments on the proposed rule from 41 
commenters, including 32 depository institutions and organizations 
representing depository institutions, six consumers and consumer 
groups, and three other organizations. The vast majority of commenters 
agreed that it was appropriate for Regulation J to contain a Check 21-
like liability structure for electronic items that would allow Reserve 
Banks and other recipients of such items to pass back liabilities 
subsequently incurred under the Check 21 Act. However, commenters 
expressed concerns about specific aspects of the Board's proposed 
liability structure and made suggestions for how the Board could make 
that structure more equitable. Commenters also encouraged the Board to 
clarify that the new supplemental warranties and indemnity for 
electronic items would not alter the liability structure for substitute 
checks in the Check 21 Act and subpart D of Regulation CC. Specific 
substantive comments are discussed in more detail in the Section-by-
Section Analysis.

Overview of the Board's Final Rule

    The Board's final rule is similar to the rule that the Board 
proposed for comment. However, the Board has made a number of 
clarifying changes in response to the comments received and its own 
further analysis. These changes include adjustments to the definition 
of electronic item and to the liability structure applicable to an 
electronic item. These changes also state more directly that Regulation 
J does not alter the liability structure for substitute checks and 
paper and electronic representations of substitute checks set forth in 
Regulation CC. Moreover, the final rule provides that a sender of an 
electronic item makes the Uniform Commercial Code (U.C.C.) transfer 
warranties for an electronic item as if it were an item subject to the 
U.C.C. and makes the warranties of Sec.  229.34 of Regulation CC as if 
the electronic item were a check subject to that section.

Section-by-Section Analysis

    This section-by-section analysis focuses on the provisions of the 
existing or proposed rule that the Board changed or that were the 
subject of comments or the Board's own further analysis. For all other 
provisions, the Board's reasoning in the section-by-section analysis of 
the Board's proposed rule is incorporated by reference.

Section 210.2 Definitions

    A. In General. One commenter suggested that the final rule should 
use the terms ``person'' and ``party'' in a manner consistent with the 
U.C.C.'s usage of those terms. The Board agrees that Regulation J's 
word usage should be consistent with the U.C.C. and has made revisions 
accordingly.
    Some commenters asked the Board to clarify that when Regulation J 
uses the term ``handle'' with respect to a substitute check, that term 
refers to a transfer, presentment, or return of a substitute check. 
These commenters sought clarification that by ``handling'' a substitute 
check under Regulation J, the sender would make the substitute check 
warranties and indemnity described in subpart D of Regulation CC. 
Regulation J generally uses the term ``handle'' to refer to a transfer, 
presentment, or return, as the context requires. However, the 
substitute check warranties and indemnity are made directly under 
Regulation CC according to the terms of that regulation, which 
Regulation J does not alter. The Board's amendments to Sec. Sec.  210.5 
and 210.6, which are discussed in detail in the analysis of those 
sections, further clarify the interaction between Regulation CC and 
Regulation J.
    B. Item and electronic item. To bring electronic items under the 
coverage of Regulation J, the Board proposed to amend Regulation J's 
definition of the term ``item'' to include an electronic item. Some 
commenters requested that the Board ensure that its definition of the 
term ``item'' would not affect the U.C.C.'s definition of that term. 
All the definitions in Sec.  210.2 of Regulation J are prefaced by the 
phrase ``as used in this subpart'' and do not apply to any other law or 
regulation. Thus, the modification of the definition of the term 
``item'' for purposes of Regulation J does not alter the meaning of 
that term under the U.C.C or the meaning of the term ``check'' under 
Regulation CC.\4\
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    \4\ One commenter requested clarification about the application 
of Regulation E to electronic items. Because Regulation E explicitly 
excludes transactions originated by check from its coverage, an 
electronic item under Regulation J does not include an electronic 
fund transfer subject to Regulation E.
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    The proposed rule stated that an electronic image of a paper item 
``together with information describing that item'' was an electronic 
item (emphasis added). The Reserve Banks in some cases will handle in 
separate files the image portion of an electronic item and the 
information portion of the item, which would include a record of the 
magnetic ink character recognition (MICR) line data from the paper item 
and of any indorsements applied to the item electronically. The final 
rule therefore changes the phrase ``together with'' to ``and.'' The 
Board also has amended the electronic item definition so that 
electronic check-related information will not constitute an electronic 
item unless it is the type of electronic file that a Reserve Bank has

[[Page 62555]]

agreed to handle as an item. This revision addresses the fact that some 
check-related information that the Reserve Banks handle electronically 
is for information purposes only and is not intended for collection as 
an item or reconversion to a substitute check.

Section 210.3 General Provisions

    Some commenters recommended that the Board clarify in Sec.  
210.3(f) that nothing in Regulation J alters the liabilities of persons 
interested in a substitute check or a paper or electronic 
representation of a substitute check, as established by the Check 21 
Act and subpart D of Regulation CC. As discussed in more detail in the 
analysis of Sec. Sec.  210.5 and 210.6, the amendments to Regulation J 
are not intended to alter the application of the liability provisions 
of subpart D of Regulation CC. Although the Board has not amended Sec.  
210.3 as suggested, the final rule makes the clarification requested by 
commenters in several other places by indicating that Reserve Banks can 
be held liable under subpart D (see, e.g., Sec. Sec.  210.6(a)(2)(iii), 
210.6(c), 210.12(e)(2)(iii)), by specifically acknowledging the 
applicability of Regulation CC to items collected through Reserve Banks 
(see, e.g., Sec. Sec.  210.5(a)(5)(i)(C), 210.5(b), 210.12(c)(5)(i)(C), 
and 210.12(d)), and by stating that nothing in Regulation J alters the 
liability that senders of substitute checks (or representations 
thereof) bear under subpart D (see, e.g., Sec. Sec.  
210.5(a)(5)(ii)(B), 210.12(c)(5)(ii)(B)).

Section 210.4 Sending Items to Reserve Banks

    The Board proposed to amend Sec.  210.4(b)(1) to clarify that the 
Administrative Reserve Bank of the paying bank was deemed to have 
handled an item sent to a Reserve Bank for collection. On further 
reflection, the Board has deemed that this clarification is not 
necessary.

Section 210.5 Sender's Agreement; Recovery by Reserve Bank; Section 
210.6 Status, Warranties and Liability of Reserve Bank

    A. Addition of U.C.C. transfer warranties and Regulation CC Sec.  
229.34 warranties for all electronic items. The U.C.C. generally is 
understood to apply to items in paper form, although it allows a paying 
bank to agree to receive electronic presentment of an item. When 
presentment is made electronically by agreement, U.C.C. 4-110 treats 
the presentment notice as an item or a check as those terms are defined 
in the U.C.C., and the presenting bank therefore makes the presentment 
warranties in U.C.C. 4-208 to the paying bank. However, electronic 
items as defined in Regulation J that are handled for collection rather 
than presentment might not be items or checks under the U.C.C. and are 
not checks under Regulation CC. As a result, electronic items sent for 
collection might not be subject to the transfer warranties in U.C.C. 4-
207 and are not subject the check collection warranties in Sec.  
229.34(c) of Regulation CC.
    To ensure a full chain of U.C.C. transfer warranties and Regulation 
CC Sec.  229.34(c) warranties for an item that a Reserve Bank receives 
or sends in electronic form, the Board's final rule adds a paragraph to 
Sec.  210.5(a) that provides that by sending an electronic item a 
sender makes all the warranties set forth in and subject to the terms 
of U.C.C. 4-207 as if the electronic item were an item subject to the 
U.C.C. and makes the warranties set forth in Sec.  229.34(c) of 
Regulation CC as if the electronic item were a check subject to that 
section. Section 210.6(b) contains corresponding Reserve Bank 
warranties. These new warranties apply to all electronic items, 
regardless of whether they are derived directly from an original check 
or from a substitute check. Because senders and Reserve Banks must make 
these new warranties for an electronic item subject to the terms of 
U.C.C. 4-207 and Sec.  229.34(c) of Regulation CC, they must make these 
warranties to all the parties described in U.C.C. 4-207 and Sec.  
229.34(c) of Regulation CC.
    B. Content of supplemental warranties for electronic items that are 
not representations of substitute checks. Under proposed Sec.  
210.5(a)(4)(i) and Sec.  210.6(b)(3)(i), the sender of an electronic 
item would warrant, among other things, that the item ``accurately 
represents all of the information on the front and back of the original 
check as of the time that the original check was truncated'' and 
``replicates the MICR line of the original check, except for any 
changes required or permitted by part 229, subpart D of this chapter 
for substitute checks.'' Several commenters expressed concern about the 
use of the word ``replicate'' when describing the MICR-line content 
portion of the warranty. These commenters thought that the warranty 
should distinguish more clearly between the MICR line that appears in 
the image of the front of the original check and the separate MICR-line 
information that must accompany that image. These commenters also noted 
that the word ``replicate'' might not adequately convey the idea that, 
when creating the electronic item, the truncating bank would transfer 
the MICR-line information that appeared on the original check to a 
different format.
    Several commenters concerned with the MICR-line component of the 
warranty also suggested that a sender of an electronic item should 
warrant that the electronic item contains a record of the MICR line as 
it appeared on the original check at the time of truncation. This 
suggestion, however, would mean that if the check contained a MICR-line 
strip that omitted information previously encoded on the original 
check, only the information contained on the strip would be needed to 
satisfy the warranty. These comments were submitted prior to the 
Board's issuance of the final rule amending Regulation CC to implement 
the Check 21 Act, which requires the substitute check to contain 
information in all fields of the MICR-line that were encoded on the 
original check prior to truncation.\5\ The purpose of the MICR-line 
content warranty for an electronic item derived directly from an 
original check is to ensure that the electronic item contains all the 
information necessary for the recipient to create a substitute check 
that is the legal equivalent of the original check. The Board therefore 
believes that it is appropriate for a bank to warrant that electronic 
item contains all the information required for a substitute check.
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    \5\ See 69 FR 47290, Aug. 4, 2004, at 47310 and 47318.
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    To address the foregoing issues with respect to the MICR line 
portion of the warranties made for electronic items, Sec. Sec.  
210.5(a)(4)(i) and 210.6(b)(3)(i) of the final rule state that the 
sender warrants that ``the electronic image portion of the item 
accurately represents all of the information on the front and back of 
the original check as of the time that the original check is 
truncated'' and ``the information portion of the item contains a record 
of all MICR-line information required for a substitute check under 
Sec.  229.2(aaa) of this chapter.''
    C. Scope of recipients of warranties and indemnity for electronic 
items. Several commenters expressed concern that a Reserve Bank makes 
the warranties in existing and proposed Sec.  210.6(b)(1) to a 
subsequent collecting bank, the paying bank, and any other payor, yet 
would make the new warranties and indemnity for electronic items in 
proposed Sec.  210.6(b)(3) only to the bank to which the Reserve Bank 
transfers or presents the item. The Board notes that the scope of the 
supplemental warranties given by senders to Reserve Banks under Sec.  
210.5(a)(4) of the final rule is similarly limited. Commenters opined 
that the Reserve Banks should

[[Page 62556]]

make the supplemental warranties and indemnity in Sec.  210.6(b)(3) to 
the same parties that receive the warranties in Sec.  210.6(b)(1).
    Section 210.6(b)(1) generally restates existing warranties that 
Reserve Banks make under the U.C.C., which by the terms of that law 
flow to subsequent banks in the collection process. Proposed Sec.  
210.6(b)(3), by contrast, contains new warranties and an indemnity that 
Reserve Banks would not otherwise make under the U.C.C. or other law. 
The Board has retained the more limited scope of warrantees that 
receive the supplemental warranties for electronic items in Sec.  
210.6(b)(3).\6\ A person that receives an electronic item derived 
directly from an original check from a person other than a Reserve Bank 
can further protect itself by an agreement with its sender.
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    \6\ The supplemental warranties in Regulation J that apply the 
U.C.C. 4-207 warranties and Regulation CC Sec.  229.34(c) warranties 
to electronic items are made to all the parties listed in the U.C.C. 
and Sec.  229.34(c) of Regulation CC, respectively, which includes 
all subsequent collecting banks. The broader warrantee scope is 
appropriate for these supplemental warranties because they are 
designed to ensure that the existing U.C.C. and Regulation CC 
warranties continue to flow to all warrantees listed in those 
provisions regardless of whether the check changes form.
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    D. Scope of sender and Reserve Bank warranties and indemnity for 
substitute checks and electronic items. To clarify the full range of 
warranties and indemnities that apply to items collected by Reserve 
Banks, the proposed rule listed the check collection warranties in 
Sec.  229.34(c) of Regulation CC and the substitute check warranties 
and indemnity in subpart D of Regulation CC. The proposed amendments 
did not list other liability-related provisions of Regulation CC, such 
as the general liability provision and the interbank expedited recredit 
procedure that apply to substitute checks. Several commenters indicated 
that having a separate regulatory list of warranties and indemnities in 
Regulation J could cause confusion about how Regulation CC applies to 
checks handled by Reserve Banks or could suggest that the substitute 
check-related liability provisions that were not listed would not apply 
at all.
    Many commenters expressed concern that proposed Sec.  
210.5(a)(5)(iv)-(v), by which the sender would agree to indemnify the 
Reserve Bank for losses associated with substitute checks (and 
representations thereof) and electronic items, respectively, 
inappropriately would allow a Reserve Bank to pass back losses for 
which the Reserve Bank was responsible. Commenters particularly were 
concerned that a Reserve Bank should not be allowed to pass back to a 
sender any losses that were attributable to the Reserve Bank's fault. 
The Board believes that the existing liability provisions of Regulation 
J, which hold a Reserve Bank liable for its own failure to use ordinary 
care, would have prevented this result. However, the Board notes that 
Sec.  210.6(b)(3)(ii) of the proposed rule was overbroad because it 
would have required a Reserve Bank to indemnify the recipient for all 
its losses regardless of the recipient's fault.
    Some of the commenters that were concerned about the equity of the 
liability structure in the proposed amendments suggested that a sender 
should not be liable for losses associated with electronic items that 
were later used to create substitute checks unless the sender breached 
one of the new warranties in Regulation J. Other commenters thought 
that any loss attributable to a problem with an electronic item should 
be passed back to the person that created the electronic item, 
regardless of whether that person or a subsequent bank in the 
collection process sent the electronic item to the Reserve Bank.\7\
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    \7\ One commenter suggested that a Reserve Bank should indemnify 
its transferee for losses associated with an electronic item that is 
never reconverted into a substitute check. However, the purpose of 
the new warranties and indemnity for electronic items in Regulation 
J is to allocate losses incurred when an electronic item that is not 
subject to the Check 21 Act is used to create a substitute check.
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    The Board intends that Regulation J acknowledge, but in no way 
alter, a bank's responsibilities under subpart D of Regulation CC for 
substitute checks and under Sec.  229.34(c) for all checks. The Board 
further intends the liability for losses associated with electronic 
items to parallel the liability structure for substitute checks in 
Regulation CC as closely as possible, both for senders and for Reserve 
Banks, and to prevent any person from passing back losses attributable 
to its own fault.\8\ The Board therefore has significantly reorganized 
the warranty and indemnity provisions in Sec. Sec.  210.5 and 210.6 to 
address the comments on these topics and clarify the rule.
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    \8\ Although the warranties and indemnity in Sec. Sec.  229.52 
and 229.53 are not by their terms fault-based, the amount for which 
an indemnifying bank ultimately is liable is governed by the 
comparative negligence provisions of Sec. Sec.  229.53(b)(2) and 
229.56(a)(3).
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    The final rule omits the proposed provisions that restated the 
existing Regulation CC liability structure and incorporates into other 
paragraphs of Sec. Sec.  210.5(a) and 210.6(b) the concept that the 
Regulation CC warranty and indemnity provisions apply according to 
their terms. Specifically, Sec.  210.5(a)(5)(ii)(A) provides that 
senders of original checks are not liable for any amount that the 
Reserve Bank pays under subpart D of Regulation CC for a subsequently 
created substitute check or under Sec.  210.6(b) for an electronic 
item, absent the sender's agreement to the contrary.\9\ Section 
210.5(a)(5)(ii)(B) provides that nothing in Regulation J alters the 
liability structure that applies to substitute checks and paper or 
electronic representations of substitute checks under subpart D of 
Regulation CC.\10\ Section 210.5(a)(5)(ii)(C) provides that a sender of 
an electronic item is not liable for any amount a Reserve Bank pays 
under Sec.  210.6(b)(3) or subpart D of Regulation CC that is 
attributable to the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care. Section 210.6(b)(3)(ii)(B) contains 
substantially similar limitations to those in Sec.  210.5(a)(5)(ii)(C) 
so that Reserve Banks that handle an electronic item also will not bear 
substitute check-related losses that are attributable to the fault of a 
subsequent person in the collection process. The final rule also 
specifically states that Reserve Banks are subject to subpart D of 
Regulation CC.
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    \9\ A sender that designates certain original checks for 
accelerated processing could, for example, by the terms of an 
operating circular agree to indemnify the Reserve Bank for 
subsequent losses under subpart D of Regulation CC.
    \10\ Some commenters suggested that the sender of a substitute 
check should be required to indemnify a Reserve Bank only if the 
Reserve Bank subsequently transferred a substitute check. The Board 
notes that the loss allocation for substitute checks in Sec. Sec.  
229.52 and 229.53 of Regulation CC provide that, once a substitute 
check is created, the warranties and indemnity flow with that item 
and with any paper or electronic representation of it.
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    The Board has not, as requested by commenters, amended the 
indemnity provisions to hold a sender of an electronic item liable for 
a loss associated with a later substitute check only if the sender 
breached a Regulation J warranty. The indemnity in subpart D of 
Regulation CC covers a loss due to the receipt of a substitute check 
even in the absence of a warranty breach. For example, a substitute 
check that contains a complete and accurate image of the original check 
may be insufficient to prove a forgery claim because only the original 
check could be used for handwriting analysis. Subpart D of Regulation 
CC would allocate that loss to the reconverting bank. Sections 
210.5(a)(5) and 210.6(b)(3) of the final rule further allocate that 
loss to the first party subject to Regulation J that sent the 
electronic item, which could be the bank that sent the electronic item 
to the Reserve Bank or the Reserve Bank itself.

[[Page 62557]]

Thus, Regulation J places the loss with the bank whose choice to handle 
an item electronically necessitated the later creation of a substitute 
check.
    The final rule also does not, as requested by commenters, allocate 
losses associated with an electronic item to a person that handled the 
item prior to the Reserve Bank's sender. The warranties and indemnity 
in existing and proposed Regulation J are first made by the sender of 
the item to a Reserve Bank because Regulation J only governs items that 
are collected by the Reserve Banks. The Board believes that allocating 
liability for any item in Regulation J to a person prior to the Reserve 
Bank's sender would be inappropriate, because that person may have no 
control over whether the item was handled by a Reserve Bank. However, a 
Reserve Bank's sender that received an electronic item from another 
person could protect itself through its agreement with that person.
    E. Procedures for claims against Reserve Banks. Several commenters 
opined that the standard for accrual of a claim for an electronic item 
that is not a representation of a substitute check in Sec.  210.6(d)(2) 
should be the same as the accrual standard for substitute check claims 
in Sec.  229.56(c) of Regulation CC. This is the result intended by the 
Board, and proposed Sec.  210.6(d)(2) reached this result by using 
language identical to that in Sec.  229.56(c). The final rule therefore 
retains the proposed accrual language.
    Some commenters expressed concern that the statement in Sec.  
210.6(d)(3) of the proposed rule that paragraph (d) ``does not 
lengthen'' the time for bringing a claim under Regulation CC implied 
that paragraph (d) could shorten the otherwise applicable timeframe. 
The final rule therefore states that Sec.  210.6(d) ``does not alter'' 
the time periods for bringing actions under the sections of Regulation 
CC that it references.

Section 210.12

    Section 210.12 sets forth a liability structure for returned checks 
that is substantially similar to the liability structure in Sec. Sec.  
210.5 and 210.6 that applies to items handled for forward collection. 
The proposed amendments to Sec.  210.12 therefore closely paralleled 
the proposed amendments to corresponding portions of Sec. Sec.  210.5 
and 210.6. Accordingly, the final amendments to Sec.  210.12 are 
identical or substantially similar to those discussed in the analysis 
Sec. Sec.  210.5 and 210.6.

Regulatory Flexibility Act

    The Board has reviewed the final rule's impact on small banks in 
accordance with the final regulatory flexibility analysis requirements 
in the Regulatory Flexibility Act (12 U.S.C. 604).
    Under section 3 of the Small Business Act, as implemented at 13 CFR 
part 121, subpart A, a bank is considered a ``small entity'' or ``small 
bank'' for purposes of the Regulatory Flexibility Act if it has $150 
million or less in assets. Based on June 2004 call report data, the 
Board estimates that there are approximately 14,221 depository 
institutions with assets of $150 million or less. The final amendments 
will apply to all depository institutions, regardless of size, that 
obtain check collection services from a Reserve Bank.
    As discussed in the preceding sections, the final amendments are 
necessary to facilitate the electronic collection of checks by Reserve 
Banks as contemplated by the Check 21 Act. Commenters generally 
supported the proposed amendments and did not submit comments on the 
Regulatory Flexibility Act section. The primary effect of the final 
amendments is to provide that each bank that sends an electronic item 
to a Reserve Bank for forward collection or return would make 
warranties and an indemnity for that item. The new warranties and 
indemnity in Regulation J are similar to the warranties and indemnity 
that apply to paper checks under existing Regulation J and other law. 
Although the Reserve Banks could protect themselves with respect to 
electronic items by agreement, the Board believes that it is 
appropriate at this time to bring electronic items within the coverage 
of Regulation J. The final amendments generally apply only to those 
banks that choose to send items to Reserve Banks electronically. These 
amendments do not require any bank to change the form in which it 
submits checks, nor do they require any bank to submit reports, 
maintain records, or provide notices or disclosures.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR part 1320 Appendix A.1), the Board has reviewed the final 
rule under the authority delegated to the Board by the Office of 
Management and Budget. The final rule contains no new collections of 
information and proposes no substantive changes to existing collections 
of information pursuant to the Paperwork Reduction Act.

Administrative Procedure Act

    The Board has found good cause that the final amendments should 
take effect on October 28, 2004. The Check 21 Act takes effect on that 
date and is designed to facilitate the electronic processing of checks. 
Without a warranty and indemnity structure for electronic items derived 
directly from original checks, such as that in the final amendments, 
the Reserve Banks cannot offer a wider range of electronic check 
processing services as anticipated by the Check 21 Act. To maximize 
banks' ability to use the Federal Reserve's new electronic check 
processing services facilitated by the Check 21 Act, the effective date 
of Regulation J should coincide with the effective date of the Act. 
Moreover, the Board notes that no bank is required to change its check 
processing procedures as a result of the rule and that the new 
provisions of the final rule generally apply only to those banks that 
choose to send items electronically to the Reserve Banks. The final 
rule also does not impose any reporting, recordkeeping, or reporting 
requirements for any bank. Accordingly, having the amendments take 
effect on October 28 should provide benefits to those banks that want 
to rely on the Check 21 Act to process checks electronically without 
any countervailing disadvantages to those or any other banks. For the 
foregoing reasons, the Board has determined that good cause exists for 
making the rule effective on October 28, 2004, to coincide with the 
effective date of the Check 21 Act.

12 CFR Chapter II

List of Subjects in 12 CFR Part 210

    Banks, Banking.

Authority and Issuance

0
For the reasons set forth in the preamble, the Board is amending 12 CFR 
part 210 to read as follows:

PART 210--COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE 
BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)

0
1. The authority citation for part 210 is revised to read as follows:

    Authority: 12 U.S.C. 248(i), (j), and (o), 342, 360, 464, 4001-
4010, and 5001-5018.


Sec.  210.1  [Amended]

0
2. In Sec.  210.1, add the phrase ``the Check Clearing for the 21st 
Century Act (12 U.S.C. 5001-5018);'' between the phrases ``the 
Expedited Funds Availability Act (12 U.S.C. 4001 et seq.);'' and ``and 
other laws'' in the first sentence.


Sec.  210.2  [Amended]

0
3. In Sec.  210.2 make the following changes:

[[Page 62558]]

0
(A) Revise the last sentence of paragraph (h);
0
(B) Revise paragraphs (i), (l)(3), and (n);
0
(C) Remove the undesignated paragraph after paragraph (o);
0
(D) Revise paragraph (r); and
0
(E) Add a new paragraph (s).
    The revisions and addition read as follows:


Sec.  210.2  Definitions.

* * * * *
    (h) * * * Check as defined in 12 CFR 229.2(k) means an item defined 
as a check in 12 CFR 229.2(k) for purposes of subparts C and D of part 
229.
    (i) Item and electronic item.
    (1) Item means--
    (i) An instrument or a promise or order to pay money, whether 
negotiable or not, that is--
    (A) Payable in a Federal Reserve District \1\ (District);
---------------------------------------------------------------------------

    \1\ For purposes of this subpart, the Virgin Islands and Puerto 
Rico are deemed to be in the Second District, and Guam, American 
Samoa, and the Northern Mariana Islands in the Twelfth District.
---------------------------------------------------------------------------

    (B) Sent by a sender to a Reserve Bank for handling under this 
subpart; and
    (C) Collectible in funds acceptable to the Reserve Bank of the 
District in which the instrument is payable; and
    (ii) An electronic image of an item described in paragraph 
(i)(1)(i) of this section, and information describing that item, that a 
Reserve Bank agrees to handle as an item pursuant to an operating 
circular.
    (2) Electronic item means an item described in paragraph (i)(1)(ii) 
of this section.

    Note: Unless otherwise indicated, item includes both a cash and 
a noncash item, and includes a returned check sent by a paying or 
returning bank. Item does not include a check that cannot be 
collected at par, or a payment order as defined in Sec.  210.26(i) 
and handled under subpart B of this part.

* * * * *
    (1) * * *
    (3) The bank whose routing number appears on a check in the MICR 
line or in fractional form (or in the MICR-line information that 
accompanies an electronic item) and to which the check is sent for 
payment or collection.
* * * * *
    (n) Sender means any of the following entities that sends an item 
to a Reserve Bank for forward collection--
    (1) A depository institution, as defined in section 19(b) of the 
Federal Reserve Act (12 U.S.C. 461(b));
    (2) A clearing institution, defined as--
    (i) An institution that is not a depository institution but that 
maintains with a Reserve Bank the balance referred to in the first 
paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 342); or
    (ii) A corporation that maintains an account with a Reserve Bank in 
conformity with Sec.  211.4 of this chapter (Regulation K);
    (3) Another Reserve Bank;
    (4) An international organization for which a Reserve Bank is 
empowered to act as depositary or fiscal agent and maintains an 
account;
    (5) A foreign correspondent, defined as any of the following 
entities for which a Reserve Bank maintains an account: a foreign bank 
or banker, a foreign state as defined in section 25(b) of the Federal 
Reserve Act (12 U.S.C. 632), or a foreign correspondent or agency 
referred to in section 14(e) of that act (12 U.S.C. 358); or
    (6) A branch or agency of a foreign bank maintaining reserves under 
section 7 of the International Banking Act of 1978 (12 U.S.C. 347d, 
3105).
* * * * *
    (r) Uniform Commercial Code and U.C.C. mean the Uniform Commercial 
Code as adopted in a state.
    (s) Terms not defined in this section. Unless the context otherwise 
requires--
    (1) The terms not defined herein have the meanings set forth in 
Sec.  229.2 of this chapter applicable to subpart C or subpart D of 
part 229 of this chapter, as appropriate; and
    (2) The terms not defined herein or in Sec.  229.2 of this chapter 
have the meanings set forth in the Uniform Commercial Code.


Sec.  210.3  [Amended]

0
4. In Sec.  210.3(b) remove the phrase ``subpart C'' and add the phrase 
``subparts C and D'' in its place.


Sec.  210.4  [Amended]

0
5. In paragraph 210.4(b)(2), remove the word ``party'' and add the word 
``person'' in its place.


Sec.  210.5  [Amended]

0
6. In Sec.  210.5 make the following changes:
0
(A) Revise paragraph (a);
0
(B) Redesignate paragraphs (b), (c), and (d) as paragraphs (c), (d), 
and (e), respectively and add a new paragraph (b);
0
(C) Revise newly designated paragraph (c)(3);
0
(D) In the first sentence of newly designated paragraph (d)(1), remove 
the phrase ``paragraph (b)'' and add the phrase ``paragraph (c)'' in 
its place;
0
(E) Redesignate the last sentence of newly designated paragraph (d)(2) 
as paragraph (d)(3); in newly designated paragraphs (d)(2) and (d)(3), 
remove the phrase ``paragraph (c)'' wherever it appears and add the 
phrase ``paragraph (d)'' in its place; and in newly designated 
paragraph (d)(3) remove the phrase ``paragraph (a)(3)'' and add the 
phrase ``paragraph (a)(5)'' in its place; and
0
(F) In the first sentence of newly designated paragraph (e), remove the 
phrase ``subpart C of'' between the word ``or'' and the phrase ``part 
229.''
    The revisions and addition read as follows:


Sec.  210.5  Sender's agreement; recovery by Reserve Bank.

    (a) Sender's agreement. The warranties, authorizations, and 
agreements made pursuant to this paragraph may not be disclaimed and 
are made whether or not the item bears an indorsement of the sender. By 
sending an item to a Reserve Bank, the sender does all of the 
following.
    (1) Authorization to handle item. The sender authorizes the 
sender's administrative Reserve Bank and any other Reserve Bank or 
collecting bank to which the item is sent to handle the item (and 
authorizes any Reserve Bank that handles settlement for the item to 
make accounting entries), subject to this subpart and to the Reserve 
Banks' operating circulars, and warrants its authority to give this 
authorization.
    (2) Warranties for all items. The sender warrants to each Reserve 
Bank handling the item that--
    (i) The sender is a person entitled to enforce the item or 
authorized to obtain payment of the item on behalf of a person entitled 
to enforce the item;
    (ii) The item has not been altered; and
    (iii) The item bears all indorsements applied by parties that 
previously handled the item, in paper or electronic form, for forward 
collection or return.
    (3) Warranties for all electronic items. The sender makes all the 
warranties set forth in and subject to the terms of 4-207 of the U.C.C. 
for an electronic item as if it were an item subject to the U.C.C. and 
makes the warranties set forth in and subject to the terms of Sec.  
229.34(c) of this chapter for an electronic item as if it were a check 
subject to that section.
    (4) Warranties for electronic items that are not representations of 
substitute checks. If an electronic item is not a representation of a 
substitute check, the sender of that item warrants to each Reserve Bank 
handling the item that--
    (i) The electronic image portion of the item accurately represents 
all of the information on the front and back of the original check as 
of the time that the original check was truncated; the information 
portion of the item contains a record of all MICR-line information 
required for a substitute check under

[[Page 62559]]

Sec.  229.2(aaa) of this chapter; and the item conforms to the 
technical standards for an electronic item set forth in an operating 
circular; and
    (ii) No person will receive a transfer, presentment, or return of, 
or otherwise be charged for, the electronic item, the original item, or 
a paper or electronic representation of the original item such that the 
person will be asked to make payment based on an item it already has 
paid.
    (5) Sender's liability to Reserve Bank. (i) Except as provided in 
paragraph (a)(5)(ii) of this section, the sender agrees to indemnify 
each Reserve Bank for any loss or expense sustained (including 
attorneys' fees and expenses of litigation) resulting from--
    (A) The sender's lack of authority to make the warranty in 
paragraph (a)(1) of this section;
    (B) Any action taken by the Reserve Bank within the scope of its 
authority in handling the item; or
    (C) Any warranty or indemnity made by the Reserve Bank under Sec.  
210.6(b) of this subpart, part 229 of this chapter, or the U.C.C.
    (ii) A sender's liability for warranties and indemnities that the 
Reserve Bank makes for a substitute check, a paper or electronic 
representation thereof, or any other electronic item is subject to the 
following conditions and limitations--
    (A) A sender of an original check shall not be liable under 
paragraph (a)(5)(i) of this section for any amount that the Reserve 
Bank pays under subpart D of part 229 of this chapter or under Sec.  
210.6(b)(3) of this subpart, absent the sender's agreement to the 
contrary;
    (B) Nothing in this subpart alters the liability of a sender of a 
substitute check or paper or electronic representation of a substitute 
check under subpart D of part 229 of this chapter; and
    (C) A sender of an electronic item that is not a representation of 
a substitute check shall not be liable for any amount that the Reserve 
Bank pays under subpart D of part 229 of this chapter or Sec.  
210.6(b)(3)(ii) of this subpart that is attributable to the Reserve 
Bank's own lack of good faith or failure to exercise ordinary care.
    (b) Sender's liability under other law. Nothing in paragraph (a) of 
this section limits any warranty or indemnity by a sender (or a person 
that handled an item prior to the sender) arising under state law or 
regulation (such as the U.C.C.), other federal law or regulation (such 
as part 229 of this chapter), or an agreement with a Reserve Bank.
    (c) * * *
    (3) Any warranty or indemnity made by the Reserve Bank under 
section 210.6(b) of this subpart, part 229 of this chapter, or the 
U.C.C.,
* * * * *


Sec.  210.6  [Amended]

0
7. In Sec.  210.6 make the following changes:
0
(A) Revise paragraphs (a) and (b); and
0
(B) Redesignate paragraph (c) as paragraph (d), add a new paragraph 
(c), and revise newly designated paragraph (d).
    The revisions and additions read as follows:


Sec.  210.6  Status, warranties, and liability of Reserve Banks.

    (a)(1) Status. A Reserve Bank that handles an item shall act as 
agent or subagent of the owner with respect to the item. This agency 
terminates when a Reserve Bank receives final payment for the item in 
actually and finally collected funds, a Reserve Bank makes the proceeds 
available for use by the sender, and the time for commencing all 
actions against the Reserve Bank has expired.
    (2) Limitations on Reserve Bank liability. A Reserve Bank shall not 
have or assume any liability with respect to an item or its proceeds 
except--
    (i) For the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care;
    (ii) As provided in paragraph (b) of this section; and
    (iii) As provided in subparts C and D of Regulation CC.
    (3) Reliance on routing designation appearing on item. A Reserve 
Bank may present or send an item based on the routing number or other 
designation of a paying bank or nonbank payor appearing in any form on 
the item when the Reserve Bank receives it. A Reserve Bank shall not be 
responsible for any delay resulting from its acting on any designation, 
whether inscribed by magnetic ink or by other means, and whether or not 
the designation acted on is consistent with any other designation 
appearing on the item.
    (b) Warranties and liability. The following provisions apply when a 
Reserve Bank presents or sends an item.
    (1) Warranties for all items. The Reserve Bank warrants to a 
subsequent collecting bank and to the paying bank and any other payor 
that--
    (i) The Reserve Bank is a person entitled to enforce the item (or 
is authorized to obtain payment of the item on behalf of a person that 
is either entitled to enforce the item or authorized to obtain payment 
on behalf of a person entitled to enforce the item);
    (ii) The item has not been altered; and
    (iii) The item bears all indorsements applied by parties that 
previously handled the item, in paper or electronic form, for forward 
collection or return.
    (2) Warranties for all electronic items. The Reserve Bank makes all 
the warranties set forth in and subject to the terms of 4-207 of the 
U.C.C. for an electronic item as if it were an item subject to the 
U.C.C. and makes the warranties set forth in and subject to the terms 
of Sec.  229.34(c) of this chapter for an electronic item as if it were 
a check subject to that section.
    (3) Warranties and indemnity for electronic items that are not 
representations of substitute checks. (i) If the electronic item is not 
a representation of a substitute check, the Reserve Bank warrants to 
the bank to which it transfers or presents that item that--
    (A) The electronic image portion of the item accurately represents 
all of the information on the front and back of the original check as 
of the time that the original check was truncated; the information 
portion of the item contains a record of all MICR-line information 
required for a substitute check under Sec.  229.2(aaa) of this chapter; 
and the item conforms to the technical standards for an electronic item 
set forth in an operating circular; and
    (B) No person will receive a transfer, presentment, or return of, 
or otherwise be charged for, the electronic item, the original item, or 
a paper or electronic representation of the original item such that the 
person will be asked to make payment based on an item it already has 
paid.
    (ii) If the item is an electronic item that is not a representation 
of a substitute check--
    (A) Except as provided in paragraph (b)(3)(ii)(B) of this section, 
the Reserve Bank agrees to indemnify the bank to which it transfers or 
presents the electronic item (the recipient bank) for the amount of any 
losses that the recipient bank incurs under subpart D of part 229 of 
this chapter for an indemnity that the recipient bank was required to 
make under subpart D of part 229 of this chapter in connection with a 
substitute check later created from the electronic item.
    (B) The Reserve Bank shall not be liable under paragraph 
(b)(3)(ii)(A) of this section for any amount that the recipient bank 
pays under subpart D of part 229 of this chapter that is attributable 
to the lack of good faith or failure to exercise ordinary care of the 
recipient bank or a person that handled the item, in any form, after 
the recipient bank.
    (c) Limitation on liability. A Reserve Bank shall not have or 
assume any liability to the paying bank or other

[[Page 62560]]

payor, except as provided in paragraph (b) of this section, Sec.  
229.34(c) or subpart D of part 229 of this chapter, or for the Reserve 
Bank's own lack of good faith or failure to exercise ordinary care.
    (d) Time for commencing action against Reserve Bank. (1) A claim 
against a Reserve Bank for lack of good faith or failure to exercise 
ordinary care shall be barred unless the action on the claim is 
commenced within two years after the claim accrues. Such a claim 
accrues on the date when a Reserve Bank's alleged failure to exercise 
ordinary care or to act in good faith first results in damages to the 
claimant.
    (2) A claim that arises under paragraph (b)(3) of this section 
shall be barred unless the action on the claim is commenced within one 
year after the claim accrues. Such a claim accrues as of the date on 
which the claimant first learns, or by which the claimant reasonably 
should have learned, of the facts and circumstances giving rise to the 
claim.
    (3) This paragraph (d) does not alter the time limit for claims 
under section 229.38(g) of this chapter (which include claims for 
breach of warranty under Sec.  229.34 of this chapter) or subpart D of 
part 229 of this chapter.


Sec.  210.12  [Amended]

0
8. In Sec.  210.12 make the following changes:
0
(A) In paragraph (b)(2), remove the word ``party'' and add the word 
``person'' in its place;
0
(B) Revise paragraph (c);
0
(C) Redesignate paragraphs (d), (e), (f), (g), (h), and (i) as 
paragraphs (e), (f), (g), (h), (i), and (j), respectively, and add a 
new paragraph (d);
0
(D) Revise newly designated paragraphs (e) and (f)(3);
0
(E) In newly designated paragraph (g), remove the phrase ``paragraph 
(d)'' and add the phrase ``paragraph (e)'' in its place; remove the 
phrase ``paragraph (f)'' wherever it appears and add the phrase 
``paragraph (g)'' in its place; and remove the phrase ``paragraph 
(c)(3)'' and add the phrase ``paragraph (c)(5)'' in its place.
    The revisions and addition read as follows:


Sec.  210.12  Return of cash items and handling of returned checks.

* * * * *
    (c) Paying bank's and returning bank's agreement. The warranties, 
authorizations, and agreements made pursuant to this paragraph may not 
be disclaimed and are made whether or not the returned check bears an 
indorsement of the paying bank or returning bank. By sending a returned 
check to a Reserve Bank, the paying bank or returning bank does all of 
the following.
    (1) Authorization to handled returned check. The paying bank or 
returning bank authorizes the paying bank's or returning bank's 
administrative Reserve Bank, and any other Reserve Bank or returning 
bank to which the returned check is sent, to handle the returned check 
(and authorizes any Reserve Bank that handles settlement for the 
returned check to make accounting entries) subject to this subpart and 
to the Reserve Banks' operating circulars.
    (2) Warranties for all returned checks. The paying bank or 
returning bank warrants to each Reserve Bank handling a returned check 
that the returned check bears all indorsements applied by parties that 
previously handled the returned check, in paper or electronic form, for 
forward collection or return.
    (3) Warranties for all returned checks that are electronic items. A 
paying bank or returning bank that sends a returned check that is an 
electronic item makes the returning bank warranties set forth in and 
subject to the terms of Sec.  229.34 of this chapter for the electronic 
item as if it were a check subject to that section.
    (4) Warranties for returned checks that are electronic items that 
are not representations of substitute checks. If the returned check is 
an electronic item that is not a representation of a substitute check, 
the paying bank or returning bank warrants to each Reserve Bank 
handling the returned check that--
    (i) The electronic image portion of the item accurately represents 
all of the information on the front and back of the original check as 
of the time that the original check was truncated; the information 
portion of the item contains a record of all MICR-line information 
required for a substitute check under Sec.  229.2(aaa) of this chapter; 
and the item conforms to the technical standards for an electronic item 
set forth in an operating circular; and
    (ii) No person will receive a transfer, presentment, or return of, 
or otherwise be charged for, the electronic item, the original item, or 
a paper or electronic representation of the original item such that the 
person will be asked to make payment based on an item it already has 
paid.
    (5) Paying bank or returning bank's liability to Reserve Bank. (i) 
Except as provided in paragraph (c)(5)(ii) of this section, a paying 
bank or returning bank agrees to indemnify each Reserve Bank for any 
loss or expense (including attorneys' fees and expenses of litigation) 
resulting from--
    (A) The paying or returning bank's lack of authority to give the 
authorization in paragraph (c)(1) of this section;
    (B) Any action taken by a Reserve Bank within the scope of its 
authority in handling the returned check; or
    (C) Any warranty or indemnity made by the Reserve Bank under 
paragraph (e) of this section or part 229 of this chapter.
    (ii) A paying bank's or returning bank's liability for warranties 
and indemnities that a Reserve Bank makes for a returned check that is 
a substitute check, a paper or electronic representation thereof, or 
any other electronic item is subject to the following conditions and 
limitations--
    (A) A paying bank or returning bank that sent an original check 
shall not be liable for any amount that a Reserve Bank pays under 
subpart D of part 229 of this chapter or under Sec.  210.12(e)(1)(iii) 
of this subpart, absent the paying bank's or returning bank's agreement 
to the contrary;
    (B) Nothing in this subpart alters the liability under subpart D of 
part 229 of this chapter of a paying bank or returning bank that sent a 
substitute check or a paper or electronic representation of a 
substitute check; and
    (C) A paying bank or returning bank that sent an electronic item 
that is not a representation of a substitute check shall not be liable 
under paragraph (c)(5)(i) of this section for any amount that the 
Reserve Bank pays under subpart D of part 229 of this chapter or 
paragraph (e)(1)(iii) of this section that is attributable to the 
Reserve Bank's own lack of good faith or failure to exercise ordinary 
care.
    (d) Preservation of other warranties and indemnities. Nothing in 
paragraph (c) of this section limits any warranty or indemnity by a 
returning bank or paying bank (or a person that handled an item prior 
to that bank) arising under state law or regulation (such as the 
U.C.C.), other federal law or regulation (such as part 229 of this 
chapter), or an agreement with a Reserve Bank.
    (e) Warranties by and liability of Reserve Bank. (1) The following 
provisions apply when a Reserve Bank handles a returned check under 
this subpart.
    (i) Warranties for all items. The Reserve Bank warrants to the bank 
to which it sends the returned check that the returned check bears all 
indorsements applied by parties that previously handled the returned 
check, in paper or electronic form, for forward collection or return.
    (ii) Warranties for all returned checks that are electronic items. 
A Reserve Bank that sends a returned check that is an electronic item 
makes the returning

[[Page 62561]]

bank warranties set forth in and subject to the terms of Sec.  229.34 
of this chapter as if the electronic item were a check subject to that 
section.
    (iii) Warranties and indemnity for returned checks that are 
electronic items that are not representations of substitute checks.
    (A) If the returned check is an electronic item that is not a 
representation of a substitute check, the Reserve Bank warrants to the 
bank to which it sends the returned check that--
    (1) The electronic image portion of the item accurately represents 
all of the information on the front and back of the original check as 
of the time that the original check was truncated; the information 
portion of the item contains a record of all MICR-line information 
required for a substitute check under Sec.  229.2(aaa) of this chapter; 
and the item conforms with the technical standards for an electronic 
item set forth in an operating circular; and
    (2) No person will receive a transfer, presentment, or return of, 
or otherwise be charged for, the electronic item, the original item, or 
a paper or electronic representation of the original item such that the 
person will be asked to make payment based on an item it already has 
paid.
    (B) If the returned check is an electronic item that is not a 
representation of a substitute check--
    (1) Except as provided in paragraph (e)(1)(iii)(B)(2) of this 
section, the Reserve Bank agrees to indemnify the bank to which it 
sends the returned check (the recipient bank) for the amount of any 
losses that the bank incurs under subpart D of part 229 of this chapter 
for an indemnity that the bank was required to make under subpart D of 
part 229 of this chapter in connection with a substitute check later 
created from the returned check.
    (2) A Reserve Bank shall not be liable under paragraph 
(e)(1)(iii)(B)(1) of this section for any amount that the recipient 
bank pays under subpart D of part 229 of this chapter that is 
attributable to the lack of good faith or failure to exercise ordinary 
care of the recipient bank or a person that handled the item, in any 
form, after the recipient bank.
    (2) A Reserve Bank shall not have or assume any other liability to 
any person except--
    (i) As provided in paragraph (e)(1) of this section;
    (ii) For the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care as provided in subpart C of part 229 of this 
chapter; or
    (iii) As provided in subpart D of part 229 of this chapter.
    (f) * * *
    (3) Any warranty or indemnity made by the Reserve Bank under 
paragraph (e) of this section or part 229 of this chapter,
* * * * *


Sec.  210.13  [Amended]

0
9. In Sec.  210.13, remove the word ``party'' wherever it appears and 
add the word ``person'' in its place, and remove the citation ``Sec.  
210.9(a)(5)'' and add the citation ``Sec.  210.9(b)(5)'' in its place.

    By order of the Board of Governors of the Federal Reserve 
System, October 22, 2004.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 04-24049 Filed 10-26-04; 8:45 am]
BILLING CODE 6210-01-P