71218 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 

1There is no commonly accepted term for these 

items. The terms ‘‘remotely created check,’’

‘‘telecheck,’’ ‘‘preauthorized drafts,’’ and ‘‘paper 

draft’’ are among the terms that describe these 

items. 

USDA representative’’ are added in their 

place. 

■ c. Paragraph (b)(10) is revised to read 

as follows: 

§ 93.436 Ruminants from regions of 

minimal risk for BSE. 

* * * * * 

(b) * * * 

(10) The bovines must be moved 

directly from the feedlot identified on 

APHIS Form VS 17–130 to a recognized 

slaughtering establishment in 

conveyances that must be sealed at the 

feedlot with seals of the U.S. 

Government by an accredited 

veterinarian, a State representative, or 

an APHIS official. The seals may be 

broken at the recognized slaughtering 

establishment only by an authorized 

USDA representative; 

* * * * * 

PART 94—RINDERPEST, FOOT-ANDMOUTH DISEASE, FOWL PEST (FOWL 

PLAGUE), EXOTIC NEWCASTLE 

DISEASE, AFRICAN SWINE FEVER, 

CLASSICAL SWINE FEVER, AND 

BOVINE SPONGIFORM 

ENCEPHALOPATHY: PROHIBITED 

AND RESTRICTED IMPORTATIONS 

■ 6. The authority citation for part 94 

continues to read as follows: 

Authority: 7 U.S.C. 450, 7701–7772, 7781–

7786, and 8301–8317; 21 U.S.C. 136 and 

136a; 31 U.S.C. 9701; 42 U.S.C. 4331 and 

4332; 7 CFR 2.22, 2.80, and 371.4. 

■ 7. Section 94.0 is amended by adding 

a definition of direct transloading, in 

alphabetical order, to read as follows: 

§ 94.0 Definitions. 

* * * * * 

Direct transloading. The transfer of 

cargo directly from one means of 

conveyance to another. 

* * * * * 

■ 8. In § 94.18, paragraph (d)(5)(ii) is 

revised to read as follows: 

§ 94.18 Restrictions on importation of 

meat and edible products from ruminants 

due to bovine spongiform encephalopathy. 

* * * * * 

(d) * * * 

(5) * * * 

(ii) The commodities may not be 

transloaded while in the United States, 

except for direct transloading under the 

supervision of an authorized inspector, 

who must break the seals of the national 

government of the region of origin on 

the means of conveyance that carried 

the commodities into the United States 

and seal the means of conveyance that 

will carry the commodities out of the 

United States with seals of the U.S. 

Government; 

* * * * * 

PART 95—SANITARY CONTROL OF 

ANIMAL BYPRODUCTS (EXCEPT 

CASINGS), AND HAY AND STRAW, 

OFFERED FOR ENTRY INTO THE 

UNITED STATES 

■ 9. The authority citation for part 95 

continues to read as follows: 

Authority: 7 U.S.C. 8301–8317; 21 U.S.C. 

136 and 136a; 31 U.S.C. 9701; 7 CFR 2.22, 

2.80, and 371.4. 

■ 10. Section 95.1 is amended by adding 

a definition of direct transloading, in 

alphabetical order, to read as follows: 

§ 95.1 Definitions. 

* * * * * 

Direct transloading. The transfer of 

cargo directly from one means of 

conveyance to another. 

* * * * * 

■ 11. Section 95.4 is amended by 

revising paragraph (h)(4)(ii) to read as 

follows: 

§ 95.4 Restrictions on the importation of 

processed animal protein, offal, tankage, 

fat, glands, certain tallow other than tallow 

derivatives, and serum due to bovine 

spongiform encephalopathy. 

* * * * * 

(h) * * * 

(4) * * * 

(ii) The commodities are not 

transloaded while in the United States, 

except for direct transloading under the 

supervision of an inspector, who must 

break the seals of the national 

government of the region of origin on 

the means of conveyance that carried 

the commodities into the United States 

and seal the means of conveyance that 

will carry the commodities out of the 

United States with seals of the U.S. 

Government; 

* * * * * 

Done in Washington, DC, this 21st day of 

November 2005. 

Elizabeth E. Gaston, 

Acting Administrator, Animal and Plant 

Health Inspection Service. 

[FR Doc. 05–23334 Filed 11–25–05; 8:45 am] 

BILLING CODE 3410–34–P 

FEDERAL RESERVE SYSTEM 

12 CFR Parts 210 and 229 

[Regulations J and CC; Docket No. R–1226] 

Collection of Checks and Other Items 

by Federal Reserve Banks and Funds 

Transfers Through Fedwire and 

Availability of Funds and Collection of 

Checks 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Final rule. 

SUMMARY: The Board of Governors is 

adopting a final rule amending 

Regulation CC to define ‘‘remotely 

created checks’’ and to create transfer 

and presentment warranties for such 

checks. The purpose of the amendments 

is to shift liability for unauthorized 

remotely created checks to the 

depositary bank, which is generally the 

bank for the person that initially created 

and deposited the remotely created 

check. The Board is also adopting 

conforming cross-references to the new 

warranties in Regulation J. 

EFFECTIVE DATE: July 1, 2006. 

FOR FURTHER INFORMATION CONTACT: 

Adrianne G. Threatt, Counsel (202–452–

3554), or Joshua H. Kaplan, Attorney, 

(202–452–2249), Legal Division; or Jack 

K. Walton, II, Associate 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 

Existing Law and the Board’s Proposed 

Rule 

‘‘Remotely created checks’’ typically 

are created when the holder of a 

checking account authorizes a payee to 

draw a check on that account but does 

not actually sign the check.1 In place of 

the signature of the account-holder, the 

remotely created check generally bears a 

statement that the customer authorized 

the check or bears the customer’s 

printed or typed name. Remotely 

created checks can be useful payment 

devices. For example, a debtor can 

authorize a credit card company to 

create a remotely created check by 

telephone, which may enable the debtor 

to pay his credit card bill in a timely 

Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 71219 

2U.C.C. 4–401. 

3For example, the paying bank may be able to 

assert that the customer failed to notify the bank of 

the unauthorized item with ‘‘reasonable 

promptness’’ (U.C.C. 4–406(c) and (d)). 

4The FTC’s Telemarketing Sales Rule prohibits a 

telemarketer from issuing a remotely created check 

on a consumer’s deposit account without the 

consumer’s express verifiable authorization. The 

authorization is deemed verifiable if it is in writing, 

tape recorded and made available to the consumer’s 

bank upon request, or confirmed by a writing sent 

to the consumer prior to submitting the check for 

payment. 6 CFR part 310. 

5See U.C.C. 4–301 and 4–302. In limited cases, 

the paying bank may be able to recover from the 

presenting bank the amount of a check that it paid 

under the mistaken belief that the signature of the 

drawer of the draft was authorized. This remedy, 

however, may not be asserted against a person that 

took the check in good faith and for value or that 

in good faith changed position in reliance on the 

payment or acceptance. U.C.C. 3–418(a) and (c). 6 97 Eng. Rep. 871 (K.B. 1762). 

7See also Interbank of New York v. Fleet Bank, 

730 NYS 2d 208 (2001). 

8U.C.C. 3–103(16). 

9U.C.C. 3–416(a). A person that transfers a 

remotely-created consumer item for consideration 

warrants to the transferee and, if the transfer is by 

indorsement, to any subsequent transferee, that the 

person on whose account the item is drawn 

authorized the issuance of the item in the amount 

for which the item is drawn. See also U.C.C. 4–

207(a)(6), 3–417(a)(4), 4–208(a)(4). 

10For items other than remotely-created 

consumer items, the transferor must warrant only 

that it has ‘‘no knowledge’’ that the instrument is 

unauthorized. U.C.C. 3–417(a)(3). 

11U.C.C. 3–416, Official Comment, paragraph 8. 

The Official Comment notes that the provision 

supplements the FTC’s Telemarketing Sales Rule, 

which requires telemarketers to obtain the 

customer’s ‘‘express verifiable authorization.’’

12Those states include Arkansas, California, 

Colorado, Hawaii, Idaho, Iowa, Maine, Missouri, 

Minnesota, Nebraska, New Hampshire, North 

Dakota, Oregon, Tennessee, Texas, Utah, Vermont, 

West Virginia, and Wisconsin. 

manner and avoid late charges. 

Similarly, a person who does not have 

a credit card or debit card can purchase 

an item from a telemarketer by 

authorizing the seller to create a 

remotely created check. 

On the other hand, remotely created 

checks are vulnerable to fraud because 

they do not bear the drawer’s signature 

or other readily verifiable indication of 

authorization. Because remotely created 

checks are cleared in the same manner 

as other checks, it is difficult to measure 

the use of remotely created checks 

relative to other types of checks. 

However, there have been significant 

consumer and bank complaints 

identifying cases of alleged fraud using 

remotely created checks. 

Existing Law on Remotely Created 

Checks 

A remotely created check is subject to 

state law on negotiable instruments, 

specifically Articles 3 and 4 of the 

Uniform Commercial Code (U.C.C.) as 

adopted in each state. Under the U.C.C., 

a bank that pays a check drawn on the 

account of one of its customers may 

charge a customer’s account for a check 

only if the check is properly payable. A 

bank generally must recredit its 

customer’s account for the amount of 

any unauthorized check it pays.2 This 

obligation is subject to limited 

defenses.3 In addition, the paying bank 

may obtain evidence that the depositor 

did in fact authorize the check and is 

seeking to reverse the authorization. 

Under such circumstances, the paying 

bank would not be obligated to recredit 

its customer for the amount of the 

check.4

A paying bank may, until midnight of 

the banking day after a check has been 

presented to the bank, return the check 

to the bank at which the check was 

deposited if, among other things, the 

paying bank believes the check is 

unauthorized. Once its midnight 

deadline has passed, the paying bank 

generally cannot return an unauthorized 

check to the depositary bank.5

The provisions of the U.C.C. cited 

above implement the rule set forth in 

the seminal case of Price v. Neal,6

which held that drawees of checks and 

other drafts must bear the economic loss 

when the instruments they pay are not 

properly payable because the drawer 

did not authorize the item.7 Under the 

Price v. Neal rule, the paying bank must 

bear the economic loss of an 

unauthorized check with little recourse 

other than bringing an action against the 

person that created the unauthorized 

item. This rule currently applies to all 

checks, including remotely created 

checks, in a majority of states. 

The policy rationale for the Price v. 

Neal rule is that the paying bank, rather 

than the depositary bank, is in the best 

position to judge whether the signature 

on a check is the authorized signature 

of its customer. Remotely created 

checks, however, do not bear a 

handwritten signature of the drawer that 

can be verified against a signature card. 

In most cases, the only means by which 

a paying bank could determine whether 

a remotely created check is 

unauthorized and return it in a timely 

manner would be to contact the 

customer before the midnight deadline 

passes. However, before a paying bank 

can verify the authenticity of remotely 

created checks, it first must identify 

remotely created checks drawn on its 

accounts. Because there is no code or 

feature on remotely created checks that 

would enable a paying bank to identify 

them reliably in an automated manner, 

remotely created checks rarely come to 

the attention of paying banks until a 

customer identifies the check as 

unauthorized, usually well after the 

midnight deadline. 

Recent Legal Changes to Address 

Remotely Created Checks 

Amendments to the U.C.C. 

In recognition of the particular 

problems presented by remotely created 

checks, the National Conference of 

Commissioners on Uniform State Laws 

and the American Law Institute in 2002 

approved revisions to Articles 3 and 4 

of the U.C.C. that specifically address 

remotely created checks. The U.C.C. 

revisions define a remotely created 

check (using the term ‘‘remotely-created 

consumer item’’) as ‘‘an item drawn on 

a consumer account, which is not 

created by the paying bank and does not 

bear a hand written signature purporting 

to be the signature of the drawer.’’ 8 The 

U.C.C. revisions require a person that 

transfers a remotely-created consumer 

item to warrant that the person on 

whose account the item is drawn 

authorized the issuance of the item in 

the amount for which the item is 

drawn.9 Accordingly, the U.C.C. alters 

the Price v. Neal rule for remotelycreated consumer items by shifting 

liability for those items to the 

transferors.10

These revisions rest on the premise 

that it is appropriate to shift the burden 

of ensuring authorization of a remotely 

created check to the bank whose 

customer deposited the remotely created 

check because this bank is in the best 

position to detect the fraud.11 The 

U.C.C. warranty provides an economic 

incentive for the depositary bank to 

monitor customers that deposit remotely 

created checks and, therefore, should 

have the effect of limiting the quantity 

of unauthorized remotely created checks 

that are introduced into the check 

collection system. 

Amendments to State Laws 

Fewer than half the states in the U.S. 

have amended their Articles 3 and 4 to 

include provisions to address remotely 

created checks.12 Among the states that 

have made such amendments, the 

definitions and warranties are not 

uniform in their scope or requirements. 

In addition to the state codes, some 

check clearinghouses have adopted 

warranties that apply to remotely 

created checks that are collected 

through these clearinghouses. The stateby-state approach to the adoption of 

remotely created check warranties 

complicates the determination of 

liability for remotely created checks 

collected across state lines, because the 

bank that presents a check may not be 

71220 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 

13 70 FR 10509. 

14The Board is authorized to impose on or 

allocate among depository institutions the risks of 

loss and liability in connection with any aspect of 

the payment system, including the receipt, 

payment, collection, or clearing of checks, and any 

related function of the payment system with respect 

to checks. Such liability may not exceed the amount 

of the check giving rise to the loss or liability, and, 

where there is bad faith, other damages, if any, 

suffered as a proximate consequence of any act or 

omission giving rise to the loss or liability. 12 

U.S.C. 4010(f). 

15 15 U.S.C. 1693 et seq. 

16 15 U.S.C. 1693a(6). 

subject to the same rules as the paying 

bank. 

Proposed Rule 

On March 4, 2005, the Board 

published for comment a proposal to 

amend Regulation CC to provide 

transfer and presentment warranties for 

remotely created checks.13 This 

proposal was issued pursuant to the 

Expedited Funds Availability Act (the 

EFA Act), Pub. L. 100–86, 101 Stat. 635 

(codified at 12 U.S.C. 4001 et seq.), 

which authorizes the Board to establish 

rules allocating losses and liability 

among depository institutions ‘‘in 

connection with any aspect of the 

payment system.’’ 14 As noted above, the 

check collection and return system 

operates nationally. As a result, in order 

for the remotely created check 

warranties to be effective they must 

apply uniformly and nationwide. 

The Board proposed to define a 

‘‘remotely created check’’ as a check 

that is drawn on a customer account at 

a bank, is created by the payee, and does 

not bear a signature in the format agreed 

to by the paying bank and the customer. 

Unlike the U.C.C. amendments, the 

Board’s proposed definition would 

apply to remotely created checks drawn 

on both consumer and non-consumer 

accounts. 

The Board proposed to create transfer 

and presentment warranties that would 

apply to remotely created checks that 

are transferred or presented by banks to 

other banks. Under the proposed 

warranties, any transferor bank, 

collecting bank, or presenting bank 

would warrant that the remotely created 

check that it is transferring or presenting 

is authorized according to all of its 

terms by the person on whose account 

the check is drawn. The proposed 

warranties would apply only to banks 

and ultimately would shift liability for 

the loss created by an unauthorized 

remotely created check to the depositary 

bank. A paying bank would not be able 

to assert a warranty claim under the 

Board’s proposed rule directly against a 

nonbank payee that created or 

transferred an unauthorized remotely 

created check. 

General Comments 

The Board received over 250 

comments on the proposed rule from 

depository institutions of various sizes, 

trade associations that represent 

depository institutions, state attorneys 

general, individuals, academics, 

consumer representatives, the 

Permanent Editorial Board of the U.C.C., 

and Reserve Banks. This section 

presents an overview of the central 

points contained in the comments that 

the Board received. The section-bysection analysis of the final rule, set 

forth below, discusses the comments in 

greater detail and responds to specific 

concerns regarding the definition of 

remotely created check and the scope of 

the warranties. 

The commenters provided 

overwhelming support for the proposed 

rule, although many suggested that the 

Board make specific revisions in the 

final rule. The Board received many 

comments in favor of the proposal from 

small depository institutions, many of 

which noted that they regularly suffer 

losses as the result of unwittingly 

paying remotely created checks that 

customers later identify as 

unauthorized. Large depository 

institutions and their trade associations 

also strongly supported the proposal 

and specifically addressed a number of 

important issues discussed below. 

Only one depository institution 

opposed the proposal in its entirety, 

arguing that there is no factual predicate 

for the proposed rule because paying 

banks do not verify the authenticity of 

customer signatures on any checks. The 

Board believes that many banks do 

examine signatures on some subset of 

checks. Nevertheless, given that 

remotely created checks do not bear a 

verifiable mark of authentication, the 

depositary bank is in a better position to 

prevent the introduction of 

unauthorized remotely created checks 

into the check collection process by 

acquainting itself with the business 

practices of its customers who routinely 

deposit such checks. The purpose of the 

Board’s rule is to create an economic 

incentive for depositary banks to 

perform the requisite due diligence on 

their customers by shifting liability for 

unauthorized remotely created checks to 

the depositary bank. 

Some commenters, including 

Attorneys General representing 35 

states, recommended that the Board 

prohibit the use of remotely created 

checks altogether, arguing principally 

that legitimate use of remotely created 

checks has significantly declined, 

largely as a result of new automated 

clearing house (ACH) payment 

applications that can be used in place of 

remotely created checks. Several 

commenters, however, reported an 

increase in the use of the remotely 

created checks (albeit some noting that 

this increase in use has been 

accompanied by a commensurate 

increase in unauthorized remotely 

created checks). The Board believes that 

substantial additional research would be 

required about the uses of remotely 

created checks and the commercial 

impact of an outright ban before a 

prohibition by statute or regulation 

could be justified. The Board believes 

its rule provides effective protections 

against unauthorized remotely created 

checks while still allowing for the 

legitimate use of those checks. 

Some commenters argued that 

remotely created checks also should be 

covered by the Board’s Regulation E (12 

CFR Part 205), because payments by 

remotely created check are in fact 

electronic fund transfers subject to the 

Electronic Funds Transfer Act (EFTA), 

which, among other things, requires 

certain disclosures related to transfers 

covered by the Act.15 Under the EFTA, 

the term ‘‘electronic fund transfer’’

includes any transfer of funds, other 

than a transaction originated by check, 

draft, or similar paper instrument.16

Therefore, as a general matter, the EFTA 

does not apply to funds transferred from 

a consumer’s account by means of a 

check. The commenters argued that a 

remotely created check is initiated by an 

electronic communication between the 

consumer and a third party and not by 

a check or similar paper instrument. 

Further clarification of the applicability 

of the EFTA to check transactions that 

are authorized on-line or by telephone 

must be made within the context of 

Regulation E. The Board will continue 

to monitor developments to determine 

whether further action is appropriate. 

Extension of the Midnight Deadline 

The Board invited comment on 

whether a different approach to address 

the risks of remotely created checks 

would be appropriate. One alternative 

on which the Board requested comment 

was whether the Board should extend 

the U.C.C. midnight deadline for paying 

banks that return unauthorized remotely 

created checks to give the paying bank 

more time to determine whether a 

particular check was authorized. Some 

commenters favored the approach 

because it would mirror the ACH rules 

set forth by the National Automated 

Clearing House Association for 

unauthorized ACH debits, while others 

Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 71221 

17Under the Electronic Check Clearing House 

Organization’s Uniform Paper Check Exchange 

Rules, the paying bank ‘‘may make a warranty 

claim’’ by ‘‘delivering such check to the 

clearinghouse or the depositary bank for settlement, 

in accordance with the clearinghouse’s rules for 

returned checks.’’ While the claim is processed 

through the return settlement process, the delivery 

of the check to the clearing house, and ultimately 

the depositary bank, is not a ‘‘return’’ of the check 

under the U.C.C. or Regulation CC. 

18The one commenter that favored limiting the 

scope to consumer items argued that if the 

definition covers commercial accounts, it would 

weaken the ability of the bank to contract with its 

commercial customers for timely review of account 

activity. The Board does not believe this concern 

warrants a limitation on the scope of the definition. 

The Board’s final rule creates transfer and 

presentment warranties among banks and is not 

intended to interfere with the contractual 

relationships between depository institutions and 

their customers. The legal relationship between the 

paying bank and its customer with respect to 

whether a check was authorized or whether a claim 

was made in a timely manner continues to be 

governed by state law. 

19Under California U.C.C. § 3104(k) a demand 

draft means a writing not signed by a customer that 

is created by a third party under the purported 

authority of the customer for the purpose of 

charging the customer’s account with a bank. A 

demand draft shall contain the customer’s account 

number and may contain any of the following: (1) 

The customer’s printed or typewritten name. (2) A 

notation that the customer authorized the draft. (3) 

The statement ‘‘No Signature Required’’ or words to 

that effect. 

opposed this approach arguing that it 

would delay finality of check payments. 

One commenter argued that if the Board 

adopted this approach, then it also 

should exempt remotely created checks 

from the funds availability schedule in 

Regulation CC because the availability 

schedules are generally related to the 

collection and return times for a check. 

Other commenters viewed the 

possible midnight deadline extension 

not as an alternative to creation of new 

warranties, but as a different 

enforcement mechanism for the new 

warranties. These commenters thought 

that instead of having to make a 

warranty claim outside of the check 

collection process when the paying 

bank seeks to recoup losses following a 

breach of the remotely created check 

warranty, extension of the midnight 

deadline would enable the paying bank 

to return the unauthorized remotely 

created through the check collection 

process. Many of the commenters in this 

group advocated handling the warranty 

claim on a ‘‘with entry’’ basis, which is 

a procedure that has been adopted by 

certain clearinghouses and which 

allows a warranty claim to be made 

through the procedures for returned 

checks.17 A few commenters suggested 

an additional nuance to this approach: 

unauthorized remotely created checks 

under $1000 should be handled on a 

‘‘with entry’’ basis and unauthorized 

remotely created checks over $1000 

should be handled as a warranty claim 

outside of the check collection and 

return process. 

Because the Board believes that 

finality of payment and the discharge of 

the underlying obligation are 

fundamental and valuable features of 

the check collection process, the final 

rule does not make any adjustments to 

the midnight deadline. Until otherwise 

established by agreement, banks must 

assert claims arising under transfer and 

presentment warranties for remotely 

created checks outside of the check 

collection process. 

Action by State Governments 

The Board also requested comment on 

whether it should refrain from 

addressing remotely created checks in 

Regulation CC and await adoption of the 

U.C.C. warranties for remotely created 

checks, or some variation thereof, by all 

of the states. Numerous commenters 

expressed opposition to this approach. 

Generally, these commenters argued 

that states have been too slow to act on 

this issue and have not and will not 

necessarily act uniformly. However, one 

commenter urged the Board to refrain 

from usurping the U.C.C. process, 

arguing that hesitancy by state 

legislatures to adopt a uniform law may 

signal defects in the proposed 

amendment. In light of the comments 

favoring action by the Board from the 

Permanent Editorial Board of the U.C.C., 

as well as thirty-five state Attorneys 

General, the Board believes that there is 

broad support for amendments to 

Regulation CC to address remotely 

created checks on a nationwide basis 

and that such amendments are 

appropriate. 

Section-by-Section Analysis 

Section 229.2(fff) Definition 

The Board proposed the following 

definition: A remotely created check 

means a check that is drawn on a 

customer account at a bank, is created 

by the payee, and does not bear a 

signature in the format agreed to by the 

paying bank and the customer. 

Commenters had numerous concerns 

regarding the scope of the proposed 

definition. 

On the issue of whether the definition 

of remotely created checks should cover 

items drawn on both consumer and nonconsumer accounts, all but one of the 

commenters addressing this issue 

supported covering remotely created 

checks drawn on both consumer and 

non-consumer accounts. These 

commenters stated that there is no 

reason to distinguish between fraud 

against consumers and fraud against 

businesses for purposes of this rule.18

Furthermore, one commenter noted that, 

as an operational matter, it would be 

more efficient for banks to treat 

remotely created checks drawn on both 

consumer and non-consumer accounts 

the same. For these reasons, the final 

rule applies to remotely created checks 

drawn on both consumer and nonconsumer accounts. 

With respect to the other elements of 

the definition, numerous commenters, 

particularly large depository 

institutions, preferred the following 

definition (or minor variations thereon): 

A remotely created check is a check that 

(i) Is drawn on a customer account at a 

bank, (ii) is not created by the paying 

bank, and (iii) does not bear a signature 

purporting to be the signature of the 

customer. In the alternative, several 

commenters favored the definition of 

demand draft in the commercial code of 

California, arguing that this definition 

has been adopted in a number of states 

and has been applied successfully over 

the past nine years.19

With respect to the proposal that a 

remotely created check must be created 

by the payee, numerous commenters 

noted that depository institutions have 

no physical means of distinguishing 

between a remotely created check 

created by a payee and a remotely 

created check created by, for example, a 

bill payment service on behalf of the 

drawer. 

The Board considered alternative 

ways of defining remotely created 

checks from the perspective of how they 

were created. Under one formulation, 

the definition could require that a check 

not be created by the paying bank in 

order to be a remotely created check. 

The advantage of that formulation is 

that the paying bank should be able to 

determine whether it created a check 

and whether the warranty applies. That 

requirement, however, would not 

exclude a check created by the customer 

(such as a check that a customer filled 

out but forgot to sign) or the customer’s 

agent, such as a bill payment service. 

However, the Board believes that these 

checks do not present the same risk that 

the check was not actually authorized 

by the drawer as the typical 

telemarketer-created check that is made 

payable to the entity that created it. 

Under another formulation, the 

definition could exclude checks that are 

created by the paying bank as well as 

checks that are created by the customer 

or the customer’s agent. This 

formulation, however, would exclude 

from the warranty checks created by 

telemarketers or other payees to the 

71222 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 

20 12 CFR 229.2(k). 

21See e.g. U.C.C. 3–417(a)(4). 

22See footnote 14, supra. 

extent they were acting as agent of the 

customer, as well as checks created on 

behalf of the customer by a bill payment 

service. At a minimum, this formulation 

would raise issues as to the scope of the 

creating entity’s agency and would seem 

to cause as many evidentiary difficulties 

as the Board’s original proposal. 

After considering the benefits and 

drawbacks of each formulation, the 

definition in the Board’s final rule 

requires that a remotely created check 

must be created by a person other than 

the paying bank. This definition will be 

operationally efficient for paying banks 

because they easily can determine 

whether the warranty applies to a 

particular check. In addition, this 

formulation is consistent with the 

analogous definition in the U.C.C. 

Under this definition, the parties to the 

check will not have to distinguish 

checks that are created by the payee 

from checks that are created by a 

customer’s bill-payment service in order 

to assert a warranty claim. As noted 

above, the definition will cover certain 

checks created remotely by bill-payment 

services, as well as checks that the 

drawer created but neglected to sign, 

where there is a less compelling reason 

for shifting liability for unauthorized 

checks to the depositor’s bank. 

Including these checks, however, is 

unlikely to result in significantly greater 

liability for depositary banks. It appears 

that such checks are generally less 

prone to fraud, and, therefore, less 

prone to trigger a warranty claim than 

are payee-created checks. 

Numerous commenters objected to the 

requirement that a remotely created 

check not bear a signature ‘‘in the 

format’’ agreed to by the paying bank 

and the customer. Many commenters 

argued that litigation will ensue over the 

meaning of the phrase ‘‘in the format,’’

and that the language will sweep 

traditional forged checks into the 

warranty because a forged check may be 

deemed to not bear a signature in the 

format agreed to by the paying bank and 

its customer. Most commenters favored 

focusing simply on whether a signature 

was present or not. The language of the 

proposed definition was intended to 

introduce greater specificity around the 

term ‘‘signature,’’ which is very broadly 

defined under the U.C.C., to ensure that 

the definition does not include 

traditional forged checks in the 

warranties. However, in light of the 

persuasive criticism from numerous 

commenters, the final rule requires that 

a remotely created check not bear a 

signature ‘‘applied by, or purported to 

be applied by, the person on whose 

account the check is drawn.’’ The 

commentary to the final rule explains 

that the term ‘‘applied by’’ refers to the 

physical act of placing the signature on 

the check. This formulation should 

more clearly exclude traditional forged 

checks from the operation of the new 

warranties, but include checks created 

by telemarketers and similar payees. 

Several commenters noted that under 

the definition of customer account in 

Regulation CC, checks drawn on 

accounts such as money market 

accounts and credit accounts would be 

excluded from the definition of 

remotely created check, because the 

proposed definition is limited to checks 

drawn on a customer account, which 

under Regulation CC does not include 

all types of accounts on which checks 

can be drawn. These commenters 

pointed out that the U.C.C. definition of 

remotely created checks, which covers 

‘‘accounts’’ as defined by the U.C.C., 

includes checks drawn on various types 

of consumer checking accounts and the 

Board should also expand its definition 

of customer account for purposes of the 

remotely created check warranties. The 

Board sees no reason to exclude these 

types of checks from the operation of 

the new warranties and the final rule 

expands the definition of account in the 

final rule, solely for the purposes of the 

new warranties, to include any credit or 

other arrangement that allows a person 

to draw checks on a bank. 

Commenters also argued that the 

definition of remotely created check 

should cover ‘‘payable through’’ or 

‘‘payable at’’ checks. Many of these 

checks are drawn on a nonbank, such as 

a mutual fund, but payable through or 

at a bank. Under Regulation CC the term 

‘‘check’’ means a negotiable demand 

draft drawn on or payable through or at 

an office of a bank.20 Therefore, the 

definition of remotely created check 

could include a ‘‘payable through’’ or 

‘‘payable at’’ check if the other 

requirements of the regulation are met. 

With regard to the requirement that a 

remotely created check not bear the 

signature of the account-holder, the 

signature of the person on whose 

account the check is drawn would be 

the signature of the payor institution 

(e.g., a mutual fund) or the signatures of 

the customers who are authorized to 

draw checks on that account, depending 

on the arrangements between the 

‘‘payable through’’ or ‘‘payable at’’ bank, 

the payor institution, and the customers. 

The Board has added clarifying 

language to the commentary. 

One commenter urged the Board to 

confirm that a substitute check created 

from a remotely created check benefits 

from the warranties for remotely created 

checks. The commentary to the final 

rule specifically states that the transfer 

and presentment warranties for 

remotely created checks would apply to 

a substitute check that represents a 

remotely created check. 

Section 229.34 Warranties 

The Board proposed the following 

transfer and presentment warranties 

with respect to a remotely created 

check: A bank that transfers or presents 

a remotely created check and receives a 

settlement or other consideration 

warrants to the transferee bank, any 

subsequent collecting bank, and the 

paying bank that the person on whose 

account the remotely created check is 

drawn authorized the issuance of the 

check according to the terms stated on 

the check. 

Numerous commenters urged the 

Board to limit the warranty to the terms 

stated on the ‘‘face of the check.’’ Others 

urged the Board to adopt the U.C.C. 

approach, requiring only a warranty that 

‘‘the person on whose account the check 

is drawn authorized the issuance of the 

check in the amount for which it is 

drawn.’’ 21 Commenters argued that the 

proposed warranty could be construed 

to cover the indorsements on the back 

of the check and the date. The Board did 

not intend to create warranties that 

would cover the indorsements on a 

remotely created check because the 

U.C.C. already contains indorsement 

warranties. In addition, other 

information on the front of the check, 

such as the date, does not give rise to 

the risk of fraud as does the name of the 

payee and the amount. Accordingly, the 

final rule states with specificity that the 

transfer and presentment warranties 

apply only to the fact of authorization 

by the account holder, the amount 

stated on the check, and issuance to the 

payee stated on the check. 

A few commenters suggested that the 

depositor of a remotely created check 

should also be required to make the new 

warranties, as is the case with the U.C.C. 

warranties relating to remotely created 

consumer items. One commenter 

suggested that the customer of the 

paying bank should be able to assert a 

§ 229.34(d) warranty claim directly 

against a transferring or presenting 

bank. The authority under which the 

Board is adopting this amendment is 

limited to establishing rules imposing or 

allocating losses and liability among 

depository institutions in connection 

with any aspect of the payment 

system.22 However, although these 

warranties do not extend to losses and 

Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 71223 

23U.C.C. 3–417(c). 

24U.C.C. 3–417, Official Comment, 6. 

25 12 U.S.C. 5005, as implemented at 12 CFR 

229.53(a) and the accompanying commentary. 

liability as between depository 

institutions and their nonbank 

customers, banks may choose to allocate 

liability to customers by agreement. The 

final rule also does not alter the rights 

or liabilities of customers of depository 

institutions under state law. 

Commenters also suggested that the 

commentary address the situation in 

which the customer authorizes that the 

check be made payable to the payee’s 

trade name, but the check is instead 

made payable to the legal name of the 

payee. Under the new transfer and 

presentment warranties, banks will 

warrant that the customer authorized 

the issuance of the check to the payee 

stated on the check. Whether an 

alteration of the payee’s name from the 

trade name to the legal name would 

result in a breach of warranty will 

depend on whether the change is within 

the scope of the customer’s 

authorization. Because that 

determination would have to be made 

on a case-by-case basis, the Board has 

not added any general statement on 

such a situation to the commentary. 

A number of commenters urged the 

Board to state explicitly that the 

warranties would not cover the situation 

in which the initial authorization by the 

account-holder was subsequently 

disclaimed as the result of ‘‘buyer’s 

remorse’’ by the account-holder. As 

noted in the proposed rule, the Board 

anticipates that the transfer and 

presentment warranties will supplement 

the FTC’s Telemarketing Sales Rule (16 

CFR 310.3(a)(3)), which requires 

telemarketers that submit instruments 

for payment to obtain the customer’s 

‘‘express verifiable authorization.’’ A 

depositary bank could tender the 

authorization obtained by its 

telemarketer customer as a defense to a 

paying bank warranty claim. Therefore, 

the paying bank would not prevail on a 

warranty claim if the customer had, in 

fact, authorized the transaction but later 

suffered ‘‘buyer’s remorse.’’ If the 

paying bank can show that the check 

was properly payable from the 

customer’s account, then it would be 

able to charge the account for the check 

in accordance with U.C.C. 4–401. 

Defenses to Warranty Claims 

Several commenters argued that when 

a paying bank makes a claim under the 

remotely created check warranties a 

depositary bank should be able to assert 

certain defenses that the paying bank 

would have against its customer under 

the U.C.C. Specifically, the commenters 

noted that U.C.C. 4–406 places a duty 

on a customer to discover and report 

unauthorized checks with reasonable 

promptness and limits a paying bank’s 

liability if the customer fails to perform 

that duty. The commenters suggested 

that a paying bank should be precluded 

from asserting a warranty claim against 

a depositary bank where the paying 

bank’s liability to the customer would 

have been limited by U.C.C. 4–406 had 

the paying bank asserted its own 

defenses. The commenters noted that 

the U.C.C. warranty provisions permit 

similar defenses by warranting banks. 

The U.C.C. provides that the 

warrantor may defend a warranty claim 

based on an unauthorized indorsement 

or alteration by proving that the drawer 

is precluded from asserting that claim 

because of his or her failure to discover 

the lack of authorization in a timely 

manner.23 The Official Comment 

explains the purpose of the provision: if 

the drawer’s conduct contributed to a 

loss from a forged indorsement or 

alteration, the drawee should not be 

allowed to shift the loss from the drawer 

to the warrantor.24 While the drafters of 

the U.C.C. did not extend this defense 

to an unauthorized remotely-created 

consumer item, commenters argued that 

the stated purpose of the U.C.C. 3–

417(c) defense should apply to a 

remotely created check warranty claim 

under Regulation CC. The Board 

believes that such a defense would be 

appropriate. Therefore, the regulation 

and the commentary to the final rule 

provide that the depositary bank may 

defend a remotely created check 

warranty claim by proving that 

customer is precluded under U.C.C. 4–

406 from asserting a claim against the 

paying bank for the unauthorized 

issuance of the check. This may be the 

case, for example, when the customer 

fails to discover the unauthorized 

remotely created check in a timely 

manner. 

One commenter stated that the 

proposed warranty for remotely created 

checks should be limited in a way that 

is similar to the indemnification related 

to the creation and collection of 

substitute checks. The commenter 

argued that the indemnity provision of 

the Check Clearing for the 21st Century 

Act, as implemented by Regulation CC, 

shifts liability to the reconverting banks 

for losses due to the absence of security 

features that do not survive the imaging 

process, and, therefore, do not appear 

on substitute checks, only in those 

instances in which the paying bank’s 

processes actually would have relied on 

the security features that were lost in 

the imaging process. These lost security 

features, it is argued, are analogous to 

the lack of an authorized signature on 

the remotely created check.25 The 

commenter argued that by analogy the 

warranty that the Board proposed with 

respect to remotely created checks 

should not apply under circumstances 

in which the paying bank would not 

have verified the signatures anyway, for 

example because the checks were under 

the dollar amount set by the paying 

bank for such purposes. 

The Board’s rule on remotely created 

checks is intended to reduce the 

fraudulent use of unauthorized remotely 

created checks by creating an incentive 

for depositary banks to be more vigilant 

when accepting such checks for deposit. 

This incentive would be seriously 

weakened if the regulation required the 

paying bank to make the showing 

suggested by the commenter. Therefore, 

the final rule does not adopt this 

suggestion. 

Effective Date 

A number of commenters suggested 

that the final rule include an 

implementation period of not less than 

six months. The final rule is effective 

July 1, 2006. 

Additional Considerations 

MICR Line Identifier 

The Board requested comment on 

whether digits should be assigned in the 

External Processing Code (EPC) Field 

(commonly referred to as Position 44) of 

the magnetic ink character recognition 

(MICR) line to identify remotely created 

checks. Most commenters opposed this 

aspect of the proposal, arguing that the 

unassigned digits in the EPC Field could 

best serve other purposes and that 

enforcement of such a rule would be 

cumbersome at best. Ten commenters 

specifically expressed support for 

assigning digits in the EPC Field, 

arguing that it would facilitate the 

tracking of remotely created checks. 

However, without broad support for 

such a rule, and in light of the 

impracticalities of enforcement, the 

Board has determined not to pursue a 

MICR identifier for remotely created 

checks. 

Relation to State Law 

Many commenters supported the 

proposed amendment to Regulation CC 

as a means to establish uniformity with 

respect to liability for unauthorized 

remotely created checks. Some of these 

commenters presumed that the 

amendment to Regulation CC would 

preempt state laws that address 

unauthorized remotely created checks 

or their equivalents. However, several 

71224 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 

commenters raised the issue of 

preemption explicitly by stating that the 

warranties provided in Regulation CC 

should preempt state law warranties 

and that the one-year statute of limits 

for actions under subpart C of 

Regulation CC should preempt statute of 

limitations for breach of demand draft 

warranties under state law (generally 3 

years). One commenter recommended 

that the Board’s amendments explicitly 

preempt the field to eliminate confusion 

about the application of state laws that 

govern remotely created checks. Section 

608(b) of the Expedited Funds 

Availability Act provides that Board 

rules prescribed under that Act shall 

supersede any provision of state law, 

including the UCC as in effect in such 

state, that is inconsistent with the Board 

rules. To the extent that the state law is 

inconsistent with the Board’s rules on 

remotely created checks, the Board’s 

rules would supersede such state law. 

The Board will monitor the interaction 

of state law and Regulation CC, and may 

take further action at a later time if 

necessary. 

Price v. Neal 

One commenter suggested that the 

Board overrule the Price v. Neal 

doctrine for all checks. The Price v. Neal 

doctrine dates back to the 1760s and is 

based on the assumption that the paying 

bank should bear the loss for 

unauthorized checks because it is in the 

best position to prevent fraud by 

comparing signatures on checks with 

signature cards on file with the bank. 

The commenter argued that, at present, 

automated check processing that relies 

on the MICR line means that signature 

verification of checks by back-room 

personnel no longer plays a meaningful 

role in stopping check fraud. However, 

other commenters argued that the 

depositary bank generally has no better 

means to detect unauthorized checks 

than the paying bank and, therefore, the 

argument would provide no logical 

basis for abandoning the Price v. Neal 

doctrine. Furthermore, as one 

commenter noted, the advent of 

signature recognition software may soon 

enable the paying bank to verify 

signatures on an automated basis. The 

final rule reverses the Price v. Neal rule 

for remotely created checks only. 

However, the Board would welcome a 

public dialogue on broader check law 

issues, such as the utility of and 

possible alternatives to the Price v. Neal 

rule in the modern check processing 

environment. 

Conforming Amendments to Regulation 

J 

The Board is also amending 

Regulation J to make clear that the new 

remotely created check warranties apply 

to remotely created checks collected 

through the Federal Reserve Banks. 

Regulatory Analysis 

Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 3506; 

5 CFR 1320 Appendix A.1) and under 

authority delegated by the Office of 

Management and Budget, the Board has 

reviewed the final rule and determined 

that it contains no collections of 

information. 

Regulatory Flexibility Act 

In accordance with the Regulatory 

Flexibility Act (RFA), an agency must 

publish a final regulatory flexibility 

analysis with its final rule, unless the 

agency certifies that the rule will not 

have a significant economic impact on 

a substantial number of small entities. (5 

U.S.C. 601–612.) The Board certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities. 

The RFA requires agencies to examine 

the objectives, costs and other economic 

implications on the entities affected by 

the rule. (5 U.S.C. 603.) 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’’ if it has $150 

million or less in assets. Based on June 

2005 call report data, the Board 

estimates that there are approximately 

13,400 depository institutions with 

assets of $150 million or less. 

The amendments to Regulation CC 

create a definition of a remotely created 

check and warranties that apply when a 

remotely created check is transferred or 

presented. The amendments require any 

bank that transfers or presents a 

remotely created check to warrant that 

the person on whose account the 

remotely created check is drawn 

authorized the issuance of the check in 

the amount stated on the check and to 

the payee stated on the check. The 

purpose of the amendments is to place 

the liability for an unauthorized 

remotely created check on the bank that 

is in the best position to prevent the 

loss. By shifting the liability to the bank 

in the best position to prevent the loss 

caused by the payment of an 

unauthorized remotely created check, 

the Board anticipates that the 

amendments will reduce costs for all 

banks that handle remotely created 

checks. Banks seeking to minimize the 

risk of liability for transferring remotely 

created checks will likely screen with 

greater scrutiny customers seeking to 

deposit remotely created checks. The 

Board believes that the controls that 

small institutions will develop and 

implement to minimize the risk of 

accepting unauthorized remotely 

created checks for deposit likely will 

pose a minimal negative economic 

impact on those entities. Furthermore, 

there was unanimous support for 

transfer and presentment warranties for 

remotely created checks from the small 

institutions that commented on the 

proposal. These institutions noted that 

the warranties will enable them to 

reduce losses they currently suffer when 

they inadvertently pay an unauthorized 

remotely created check. 

The RFA requires agencies to identify 

all relevant Federal rules which may 

duplicate, overlap or conflict with the 

proposed rule. As noted above, the 

Board’s Regulation J includes crossreferences to the warranties set forth in 

Regulation CC and the rule amends such 

cross-references to include the 

warranties. As also noted above, the rule 

overlaps with at least 19 state codes that 

presently provide warranties for 

instruments that are similar to remotely 

created checks. 

List of Subjects in 12 CFR Parts 210 and 

229 

Banks, Banking, Federal Reserve 

System, Reporting and recordkeeping 

requirements. 

Authority and Issuance 

■ For the reasons set forth in the 

preamble, the Board is amending parts 

210 and 229 of chapter II of title 12 of 

the Code of Federal Regulations as set 

forth below: 

PART 210—COLLECTION OF CHECKS 

AND OTHER ITEMS BY FEDERAL 

RESERVE BANKS AND FUNDS 

TRANSFERS THROUGH FEDWIRE 

(REGULATION J) 

■ 1. The authority citation for part 210 

continues to read as follows: 

Authority: 12 U.S.C. 248(i) and (j), 12 

U.S.C. 342, 12 U.S.C. 464, 12 U.S.C. 4001 et 

seq., 12 U.S.C. 5001–5018. 

■ 2. In § 210.5, revise paragraph (a)(3) to 

read as follows: 

§ 210.5 Sender’s agreement; recovery by 

Reserve Bank. 

(a) * * * 

(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. 

Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 71225 

and makes the warranties set forth in 

and subject to the terms of § 229.34(c) 

and (d) of this chapter for an electronic 

item as if it were a check subject to that 

section. 

* * * * * 

■ 3. In § 210.6, revise paragraph (b)(2) to 

read as follows: 

§ 210.6 Status, warranties, and liability of 

Reserve Bank. 

* * * * * 

(b) * * * 

(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 § 229.34(c) and (d) of this 

chapter for an electronic item as if it 

were a check subject to that section. 

* * * * * 

■ 4. In § 210.9, revise paragraph (b)(5) to 

read as follows: 

§ 210.9 Settlement and payment. 

* * * * * 

(b) * * * 

(5) Manner of settlement. Settlement 

with a Reserve Bank under paragraphs 

(b)(1) through (4) of this section shall be 

made by debit to an account on the 

Reserve Bank’s books, cash, or other 

form of settlement to which the Reserve 

Bank agrees, except that the Reserve 

Bank may, in its discretion, obtain 

settlement by charging the paying 

bank’s account. A paying bank may not 

set off against the amount of a 

settlement under this section the 

amount of a claim with respect to 

another cash item, cash letter, or other 

claim under § 229.34(c) and (d) of this 

chapter (Regulation CC) or other law. 

* * * * * 

PART 229—AVAILABILITY OF FUNDS 

AND COLLECTION OF CHECKS 

(REGULATION CC) 

■ 5. The authority citation for part 229 

continues to read as follows: 

Authority: 12 U.S.C. 4001 et seq., 12 U.S.C. 

5001–5018. 

■ 6. In section 229.2, add a new 

paragraph (fff) to read as follows: 

§ 229.2 Definitions. 

* * * * * 

(fff) Remotely created check means a 

check that is not created by the paying 

bank and that does not bear a signature 

applied, or purported to be applied, by 

the person on whose account the check 

is drawn. For purposes of this 

definition, ‘‘account’’ means an account 

as defined in paragraph (a) of this 

section as well as a credit or other 

arrangement that allows a person to 

draw checks that are payable by, 

through, or at a bank. 

■ 7. In § 229.34, redesignate paragraphs 

(d), (e), and (f) as paragraphs (e), (f), and 

(g), and add a new paragraph (d) to read 

as follows: 

§ 229.34 Warranties. 

* * * * * 

(d) Transfer and presentment 

warranties with respect to a remotely 

created check. (1) A bank that transfers 

or presents a remotely created check 

and receives a settlement or other 

consideration warrants to the transferee 

bank, any subsequent collecting bank, 

and the paying bank that the person on 

whose account the remotely created 

check is drawn authorized the issuance 

of the check in the amount stated on the 

check and to the payee stated on the 

check. For purposes of this paragraph 

(d)(1), ‘‘account’’ includes an account as 

defined in § 229.2(a) as well as a credit 

or other arrangement that allows a 

person to draw checks that are payable 

by, through, or at a bank. 

(2) If a paying bank asserts a claim for 

breach of warranty under paragraph 

(d)(1) of this section, the warranting 

bank may defend by proving that the 

customer of the paying bank is 

precluded under U.C.C. 4–406, as 

applicable, from asserting against the 

paying bank the unauthorized issuance 

of the check. 

* * * * * 

■ 8. In § 229.43, revise paragraph (b)(3) 

to read as follows: 

§ 229.43 Checks payable in Guam, 

American Samoa, and the Northern Mariana 

Islands. 

* * * * * 

(b) Rules applicable to Pacific islands 

checks. * * * 

(3) § 229.34(c)(2), (c)(3), (d), (e), and 

(f); 

* * * * * 

■ 9. In Appendix E to part 229: 

■ a. Under paragraph II., § 229.2, 

paragraph (OO) is revised and a new 

paragraph (FFF) is added. 

■ b. Under paragraph XX., § 229.34, 

redesignate paragraphs D., E., and F. as 

paragraphs E., F., and G., and add a new 

paragraph D. 

Appendix E to Part 229—Commentary 

* * * * * 

II. Section 229.2 Definitions 

* * * * * 

OO. 229.2(oo) Interest Compensation 

1. This calculation of interest 

compensation derives from U.C.C. 4A–

506(b). (See §§ 229.34(e) and 229.36(f).) 

* * * * * 

FFF. 229.2(fff) Remotely Created Check 

1. A check authorized by a consumer over 

the telephone that is not created by the 

paying bank and bears a legend on the 

signature line, such as ‘‘Authorized by 

Drawer,’’ is an example of a remotely created 

check. A check that bears the signature 

applied, or purported to be applied, by the 

person on whose account the check is drawn 

is not a remotely created check. A typical 

forged check, such as a stolen personal check 

fraudulently signed by a person other than 

the drawer, is not covered by the definition 

of a remotely created check. 

2. The term signature as used in this 

definition has the meaning set forth at U.C.C. 

3–401. The term ‘‘applied by’’ refers to the 

physical act of placing the signature on the 

check. 

3. The definition of a ‘‘remotely created 

check’’ differs from the definition of a 

‘‘remotely created consumer item’’ under the 

U.C.C. A ‘‘remotely created check’’ may be 

drawn on an account held by a consumer, 

corporation, unincorporated company, 

partnership, government unit or 

instrumentality, trust, or any other entity or 

organization. A ‘‘remotely created consumer 

item’’ under the U.C.C., however, must be 

drawn on a consumer account. 

4. Under Regulation CC (12 CFR part 229), 

the term ‘‘check’’ includes a negotiable 

demand draft drawn on or payable through 

or at an office of a bank. In the case of a 

‘‘payable through’’ or ‘‘payable at’’ check, the 

signature of the person on whose account the 

check is drawn would include the signature 

of the payor institution or the signatures of 

the customers who are authorized to draw 

checks on that account, depending on the 

arrangements between the ‘‘payable through’’

or ‘‘payable at’’ bank, the payor institution, 

and the customers. 

5. The definition of a remotely created 

check includes a remotely created check that 

has been reconverted to a substitute check. 

* * * * * 

XX. Section 229.34 Warranties 

* * * * * 

D. 229.34(d) Transfer and Presentment 

Warranties 

1. A bank that transfers or presents a 

remotely created check and receives a 

settlement or other consideration warrants 

that the person on whose account the check 

is drawn authorized the issuance of the check 

in the amount stated on the check and to the 

payee stated on the check. The warranties are 

given only by banks and only to subsequent 

banks in the collection chain. The warranties 

ultimately shift liability for the loss created 

by an unauthorized remotely created check to 

the depositary bank. The depositary bank 

cannot assert the transfer and presentment 

warranties against a depositor. However, a 

depositary bank may, by agreement, allocate 

liability for such an item to the depositor and 

also may have a claim under other laws 

against that person. 

71226 Federal Register / Vol. 70, No. 227 / Monday, November 28, 2005 / Rules and Regulations 

2. The transfer and presentment warranties 

for remotely created checks supplement the 

Federal Trade Commission’s Telemarketing 

Sales Rule, which requires telemarketers that 

submit checks for payment to obtain the 

customer’s ‘‘express verifiable authorization’’

(the authorization may be either in writing or 

tape recorded and must be made available 

upon request to the customer’s bank). 16 CFR 

310.3(a)(3). The transfer and presentment 

warranties shift liability to the depositary 

bank only when the remotely created check 

is unauthorized, and would not apply when 

the customer initially authorizes a check but 

then experiences ‘‘buyer’s remorse’’ and 

subsequently tries to revoke the authorization 

by asserting a claim against the paying bank 

under U.C.C. 4–401. If the depositary bank 

suspects ‘‘buyer’s remorse,’’ it may obtain 

from its customer the express verifiable 

authorization of the check by the paying 

bank’s customer, required under the Federal 

Trade Commission’s Telemarketing Sales 

Rule, and use that authorization as a defense 

to the warranty claim. 

3. The scope of the transfer and 

presentment warranties for remotely created 

checks differs from that of the corresponding 

U.C.C. warranty provisions in two respects. 

The U.C.C. warranties differ from the 

§ 229.34(d) warranties in that they are given 

by any person, including a nonbank 

depositor, that transfers a remotely created 

check and not just to a bank, as is the case 

under § 229.34(d). In addition, the U.C.C. 

warranties state that the person on whose 

account the item is drawn authorized the 

issuance of the item in the amount for which 

the item is drawn. The § 229.34(d) warranties 

specifically cover the amount as well as the 

payee stated on the check. Neither the U.C.C. 

warranties, nor the § 229.34(d) warranties 

apply to the date stated on the remotely 

created check. 

4. A bank making the § 229.34(d) 

warranties may defend a claim asserting 

violation of the warranties by proving that 

the customer of the paying bank is precluded 

by U.C.C. 4–406 from making a claim against 

the paying bank. This may be the case, for 

example, if the customer failed to discover 

the unauthorized remotely created check in 

a timely manner. 

5. The transfer and presentment warranties 

for a remotely created check apply to a 

remotely created check that has been 

reconverted to a substitute check. 

* * * * * 

By order of the Board of Governors of the 

Federal Reserve System, November 21, 2005. 

Jennifer J. Johnson, 

Secretary of the Board. 

[FR Doc. 05–23331 Filed 11–25–05; 8:45 am] 

BILLING CODE 6210–01–P 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 363 

RIN 3064–AC91 

Independent Audits and Reporting 

Requirements 

AGENCY: Federal Deposit Insurance 

Corporation (FDIC). 

ACTION: Final rule. 

SUMMARY: The FDIC is amending part 

363 of its regulations concerning annual 

independent audits and reporting 

requirements, which implement section 

36 of the Federal Deposit Insurance Act 

(FDI Act), as proposed, but with 

modifications to the composition of the 

audit committee and the effective date. 

The FDIC’s amendments raise the assetsize threshold from $500 million to $1 

billion for internal control assessments 

by management and external auditors. 

For institutions between $500 million 

and $1 billion in assets, the 

amendments require the majority, rather 

than all, of the members of the audit 

committee, who must be outside 

directors, to be independent of 

management and create a hardship 

exemption. The amendments also make 

certain technical changes to part 363 to 

correct outdated titles, terms, and 

references in the regulation and its 

appendix. As required by section 36, the 

FDIC has consulted with the other 

federal banking agencies. 

EFFECTIVE DATE: The final rule is 

effective December 28, 2005 and applies 

to part 363 annual reports with a filing 

deadline (90 days after the end of an 

institution’s fiscal year) on or after the 

effective date of these amendments. 

FOR FURTHER INFORMATION CONTACT: 

Harrison E. Greene, Jr., Senior Policy 

Analyst (Bank Accounting), Division of 

Supervision and Consumer Protection, 

at hgreene@fdic.gov or (202) 898–8905; 

or Michelle Borzillo, Counsel, 

Supervision and Legislation Section, 

Legal Division, at mborzillo@fdic.gov or 

(202) 898–7400. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Section 112 of the Federal Deposit 

Insurance Corporation Improvement Act 

of 1991 (FDICIA) added section 36, 

‘‘Early Identification of Needed 

Improvements in Financial 

Management,’’ to the FDI Act (12 U.S.C. 

1831m). Section 36 is generally 

intended to facilitate early identification 

of problems in financial management at 

insured depository institutions above a 

certain asset size threshold (covered 

institutions) through annual 

independent audits, assessments of the 

effectiveness of internal control over 

financial reporting and compliance with 

designated laws and regulations, and 

related requirements. Section 36 also 

includes requirements for audit 

committees at these insured depository 

institutions. Section 36 grants the FDIC 

discretion to set the asset size threshold 

for compliance with these statutory 

requirements, but it states that the 

threshold cannot be less than $150 

million. Sections 36(d) and (f) also 

obligate the FDIC to consult with the 

other Federal banking agencies in 

implementing these sections of the FDI 

Act, and the FDIC has performed that 

consultation requirement. 

Part 363 of the FDIC’s regulations (12 

CFR part 363), which implements 

section 36 of the FDI Act, requires each 

covered institution to submit to the 

FDIC and other appropriate Federal and 

state supervisory agencies an annual 

report that includes audited financial 

statements, a statement of management’s 

responsibilities, assessments by 

management of the effectiveness of 

internal control over financial reporting 

and compliance with designated laws 

and regulations, and an auditor’s 

attestation report on internal control 

over financial reporting. In addition, 

part 363 provides that each covered 

institution must establish an 

independent audit committee of its 

board of directors comprised of outside 

directors who are independent of 

management of the institution. Part 363 

also includes Guidelines and 

Interpretations (Appendix A to part 

363), which are intended to assist 

institutions and independent public 

accountants in understanding and 

complying with section 36 and part 363. 

When it adopted part 363 in 1993, the 

FDIC stated that it was setting the asset 

size threshold at $500 million rather 

than the $150 million specified in 

section 36 to mitigate the financial 

burden of compliance with section 36 

consistent with safety and soundness. In 

selecting $500 million in total assets as 

the size threshold, the FDIC noted that 

approximately 1,000 of the then nearly 

14,000 FDIC-insured institutions would 

be subject to part 363. These covered 

institutions held approximately 75 

percent of the assets of insured 

institutions at that time. By imposing 

the audit, reporting, and audit 

committee requirements of part 363 on 

institutions with this percentage of the 

industry’s assets, the FDIC intended to 

ensure that the Congress’s objectives for 

achieving sound financial management 

at insured institutions when it enacted 

section 36 would be focused on those