Source: https://nafcucomplianceblog.typepad.com/nafcu_weblog/reg-cc/
Timestamp: 2019-04-25 02:26:33+00:00

Document:
Season's Greetings compliance friends! With the upcoming holiday season around the corner, I thought it would be a good idea to review Reg CC's funds availability rules when credit unions close their offices in observance of federal holidays.
Reg CC governs the availability of members' funds that are deposited into transaction accounts. The rule generally requires that cash and certain check deposits be made "available for withdrawal not later than the business day after the banking day on which the funds are deposited." 12 C.F.R. §229.10(a, c). For local check deposits, §229.12(b) requires that funds be made "available for withdrawal not later than the second business day following the banking day on which funds are deposited." Now, it is important to keep in mind the difference between a business day and a banking day. A business day is considered to be any calendar weekday that is not a federal holiday. A banking day on the other hand is any business day on which a credit union is open and able to carry on substantially all of its banking functions. See, 12 C.F.R. §229.2(f). This seems simple enough to understand during the regular course of business, but what happens when a federal holiday falls on a weekend, or the credit union decides to close the Friday after Thanksgiving? How can the credit union be required to make funds available for onsite ATM or overnight lockbox deposits when closed for the holidays?
To start, this only impacts a handful of holidays. Some federal holidays are always on a Monday, such as Labor Day or Memorial Day, and Thanksgiving is always on a Thursday. But for federal holidays with specific dates, such as Veteran's Day, Christmas Day, New Year’s Day, and Independence Day, some years the holiday will fall on a weekend and be officially observed on either the previous Friday, or the following Monday. The federal government seems to recognize Sunday holidays on the following Monday and Saturday holidays on the previous Friday. For example, this month's Veteran's Day (November 11, 2017) will be recognized on Friday, November 10, 2017, granting us an extra day to take advantage of the sales!
Accordingly, the fact that the credit union is substantially closed for business pushes the calendar forward on when the credit union will be required to make funds available for withdrawal by one banking day. Funds deposited on a day that is not a banking day (i.e. Federal holidays and other days in which the credit union is not carrying on substantially all of its banking functions), would be considered deposited on the following banking day.
Let's consider, for example, a credit union that is essentially closed on the Friday before Veterans Day or the Thursday and Friday of Thanksgiving week. For this credit union, all deposits made at an ATM or overnight lockbox during this time would be considered deposited on the following Monday. From there, the credit union would follow the general funds availability guidelines. By Tuesday, funds must be available for deposits of cash, electronic payments, U.S. Treasury checks, U.S. Postal Service money orders, Federal Reserve Bank checks, State and local government checks, Cashier's checks, certified checks, and on-us checks. By Wednesday, funds from local checks should be made available for withdrawal. For additional information, the Federal Reserve provides A Guide for Financial Institutions: Compliance with Regulation CC. Happy Shopping!
Veteran’s Day: NAFCU will be closed on Friday in observance of Veteran’s Day. We at NAFCU extend our gratitude and appreciation to current and former members of the military who have bravely served our country. We will return to carrying on substantially all of our blogging functions on Monday, November 13, 2017. Have a nice weekend.
On May 31, 2017, the Federal Reserve Board issued a final rule amending Regulation CC. Previously, we discussed how this new Regulation CC addresses electronic checks and RDC warranties and indemnifications. Now, we're going to have a look at another big change in the final rule: the expeditious return of checks.
Currently, under sections 229.30(a) and 229.31(a), a credit union returning a check is required to do so in "an expeditious manner." An expeditious manner is a manner that meets one of two tests: the two-day test or the forward collection test.
The two-day test (a/k/a the two-day/four-day test) requires that the check must be received by the depositary bank no later than 4:00pm its local time on the second business day from when the check was presented for payment.
The forward collection test compares a credit union's swiftness in its handling of a check for return to its handling of a check for collection. It requires the return to be made in the same manner that a similarly situation bank (or credit union) would normally process a check of the same amount if it had theoretically been deposited by noon on the day after it was actually presented for payment, and was being sent for collection, rather than return.
Under section 229.33, if a check is in the amount of $2,500 or more, a credit union returning the check must also provide a notice of nonpayment. That notice must be provided in a manner that meets the two-day test. The return of the check itself may serve as the required notice of nonpayment, assuming the returned check includes all the content requirements for the notice.
Part of the Fed's goals in issuing a new rule is to encourage electronic processing of checks. The Fed stated that an electronic clearing process "offers lower costs, faster returns, and fewer errors, which substantially reduces risk to the check system compared to the previous largely paper-based environment." In an effort to incentivize the implementation of electronic check returns, the Fed is implementing stricter requirements for what constitutes an expeditious return.
As we discussed in the previous blog post, under the final rule, Subpart C of Regulation CC (which contains the provisions regarding the collection of checks) will apply to "electronic checks." It will also apply to "electronic returned checks." These are electronic images of, and electronic information derived from, a paper check (or a paper returned check) that is sent to a receiving bank pursuant to an agreement and conforms with the applicable ASC X9 standards.
Under the final rule, all checks, paper and electronic, must be returned in a manner that meets a modified version of the two-day test. The forward collection test will no longer be used. Under the new two-day test, the return must be received by the depositary bank no later than 2:00pm its local time on the second business day after the check was presented for payment. Not 4:00pm local time.
The final rule also doubles the $2,500 threshold for issuing a notice of nonpayment. Once the final rule goes into effect, the notice is required if the amount of the check is $5,000 or more. That notice is also due to the depositary bank by 2:00pm (according to the depositary bank's local time), mirroring the new two-day collection test.
Lastly, the Fed added a new condition for depositary banks who might want to assert a claim when another financial institution fails to return the check in an expeditious manner. Previously, there was no such condition. Under the final rule, new section 229.33(a), the depositary bank must have arrangements in place that would allow a check return to be made electronically, directly or indirectly, by commercially reasonable means. The burden of proving that these arrangements exist is on the depository bank asserting a claim. So, under this new rule, if a credit union does not have arrangements in place to receive returned checks electronically, even indirectly, it may forfeit its right to bring a claim against another financial institution for its failure to return the check to the credit union in an expeditious manner.
The new Regulation CC goes into effect on July 1, 2018. We're continuing to dig through the rule -- so more to come.
Some of you may recall that in February 2014 the Federal Reserve Board issued a notice of proposed rulemaking to amend Regulation CC. Over three years later, on May 31, 2017 the Federal Reserve issued a final rule amending Regulation CC while simultaneously issuing another proposal on other issues. The finalized amendments will be effective on July 1, 2018. Other than some amendments and additions to the scope and definitions section, the changes largely impact Subpart C of the rule which addresses the collection of checks. The final rule is over 230 pages and we will address some more specifics in future blogs, but here's a high-level overview of some of the provisions.
(3) Subpart C of this part contains rules to expedite the collection and return of checks and electronic checks by banks. These rules cover the direct return of checks and electronic checks, the manner in which the paying bank and returning banks must return checks and electronic checks to the depositary bank, notification of nonpayment by the paying bank, indorsement and presentment of checks and electronic checks, same-day settlement for certain checks, the liability of banks for failure to comply with subpart C of this part, and other matters.
(f) Remote deposit capture indemnity.
(iii) Receives settlement or other consideration for an electronic check or substitute check related to the original check; and (iv) Does not receive a return of the check unpaid.
(2) A bank described in paragraph (f)(1) of this section shall indemnify, as set forth in § 229.34(i) [setting forth specific indemnity amounts], a depositary bank that accepts the original check for deposit for losses incurred by that depositary bank if the loss is due to the check having already been paid.
(3) A depositary bank may not make an indemnity claim under paragraph (f)(2) of this section if the original check it accepted for deposit bore a restrictive indorsement inconsistent with the means of deposit.
Finally, the Board proposed to add a new indemnity for remote deposit capture that would indemnify a depositary bank that received a deposit of an original paper check that was returned unpaid because the check was previously deposited using a remote deposit capture service and paid. Commenters expressed concern that as proposed, the indemnity would deter financial institutions from offering remote deposit capture service, thereby inhibiting its growth. Many of these commenters believed that the indemnity should not apply to checks bearing a restrictive indorsement.
The Board finds that basing the indemnity on whether the depositary bank that accepts the original check also offers remote deposit capture would not be an appropriate approach. The Board believes that the bank that accepts the original check should receive the indemnity, irrespective of whether that bank also offers remote deposit capture. As noted by many commenters, the bank that accepts a check via remote deposit capture is in the best position to address the actions of its own customer and to guard against the subsequent deposit of the paper check. The Board believes that this indemnity provides an appropriate incentive for the bank providing remote deposit capture services to take steps to minimize potential fraudulent deposits. The Board also believes that § 229.38(g) provides sufficient clarity that actions under this section must be brought within one year after the date of the occurrence of the violation involved.
Based on comments received, however, the Board has added an exception to the indemnity, and associated commentary, which would prevent a bank from making an indemnity claim if it accepted the original check containing a restrictive indorsement inconsistent with the means of deposit, such as “for mobile deposit only.” The Board believes that providing this exception may reduce accidental double deposits and may provide incentives for banks that receive remote deposit capture deposits to take steps to minimize intentionally fraudulent deposits.
NAFCU is still evaluating the rule and accompanying proposal for its impact on credit unions and will issue a Final Regulation and Regulatory Alert for members in coming weeks. In the meantime, for more information on the current state of play with Reg CC and RDC, check out this prior NAFCU blog post.
Remote Deposit Capture: Regulated by Contract or by Regulation CC?
Over the years, NAFCU's Compliance team has been asked if Regulation CC's funds availability schedule applies to checks deposited through remote deposit capture (RDC). The process of remotely depositing checks is not new; it has been around since the passing of the 21st Century Act (Check 21) in 2003. Check 21 facilitates the check collection process by permitting a member to scan a check and simply transmit the electronic images and data from the check to the credit union in order to deposit funds. While this technology eliminated the need to provide the original check to the credit union, it also left many credit unions wondering if they had to follow Regulation CC funds availability requirements.
Regulation CC defines a check as a “negotiable demand draft drawn on or payable through or at an office of a bank.” See, 12 C.F.R. § 229.2(k)(1). While checks must originate in paper form, the model Uniform Commercial Code provides that the term “item” or “check” includes transmission of an image pursuant to agreement. See, model U.C.C. § 4-110(a), (c). So it would appear that checks converted to images and remotely deposited may fit the definition. However, these "checks" are not deposited by traditional means like at a branch or an ATM. Rather, the ability of a member to deposit a check through RDC usually resides in the credit union's mobile banking app. The issue with RDC deposits is that a mobile app deposit does not fit within the strict reading of Regulation CC's definitions of a "check deposit" referenced throughout the rule. See, 12 C.F.R. § 229.10(c).
So who has the authority to interpret Regulation CC? Before the CFPB was created, the Federal Reserve Bank (FRB) had authority over Regulation CC. After Dodd-Frank, jurisdiction over Regulation CC was split down the middle. The CFPB gained authority over Subpart A (funds availability) and Subpart B (disclosure requirements); while the FRB retained authority over Subpart C (operational and payment systems) and Subpart D (Check 21). As of today, neither the FRB nor the CFPB have addressed whether an image of a check deposited through a smartphone or other mobile device is considered a check deposited in a financial institution's branch or ATM. As a side note, the CFPB and FRB did attempt to work together in 2011 to pass a joint rule to overhaul Regulation CC and even requested comments from the industry on this proposal. The proposal slightly touches on RDC and only went as far as to state that checks deposited through RDC were not considered deposited thorough a credit union's ATM. See, 76 Fed. Reg. 16867.
This has left the door open for other regulators and interested parties to weigh in. For example, the Office of the Comptroller of the Currency (OCC) released an interpretive letter on RDC in 2005. The letter determined that deposits made through RDC are not considered transactions conducted at a “branch” of a depository institution so do not fall within the funds availability requirements of Regulation CC. While not binding on credit unions, the letter is still a persuasive argument that Regulation CC does not apply to RDC deposits.
The OCC's interpretation was somewhat contradicted by an article written by the FRB of Minneapolis in 2015 that suggested Regulation CC applied to checks deposited through RDC. After receiving numerous comments, the article was redacted and all references pertaining to Regulation CC were removed because according to the author, "regulatory guidance in this area is still evolving." The change in guidance captured the sentiment that technology has evolved faster than some regulations and has left certain electronic services to be regulated contractually.
NCUA and the FFIEC have also released regulatory guidance pertaining to RDC, but their guidance is mostly about risk management. For example, NCUA issued letter 09-CU-01 regarding risk management considerations when implementing an RDC program and a second letter 09-CU-07 with a questionnaire that is used by examiners.
In addition, the FFIEC issued guidance on RDC risk management in its Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual as well as in a separate document: Risk Management of Remote Deposit Capture. The BSA/AML Examination Manual makes the overarching point that RDC programs will differ from institution to institution based on the risk assessment and provides guidance as to what risks to consider when crafting such programs. The guidance identifies contract drafting as one of the key components in a successful RDC program.
Contracts and RDC agreements are important in this case because until regulators or the courts establish whether RDC is or is not governed by Regulation CC, the credit union’s contract will govern the relationship. Of course, if a credit union's RDC agreement indicates the credit union will follow Regulation CC's funds availability schedule, it would be contractually bound to follow Regulation CC.
One thing to consider, however, is that Regulation CC does not preempt state laws regarding funds availability that do not conflict with the basic requirements of the rule. See, 12 C.F.R. § 229.20. So, it is possible that even though this issue is somewhat ambiguous as a matter of federal law, state funds availability law may requires a credit union's RDC program to adhere to state availability or notice requirements. As a result, the credit union may want to consult with local counsel to determine whether there are any specific state funds availability laws that may impact its obligations to members depositing checks through RDC.
Upcoming Webcasts. NAFCU has a couple of webcasts coming up including a free webinar that may be of interest to those planning on attending NAFCU's Regulatory Compliance School. Also don't miss our SAFE Act webinar which will help credit unions meet their annual SAFE Act training requirements.
With all the discussion of the CFPB's republishing of the consumer regulations, I thought it would be a good idea to also highlight some of the regulations that did not transfer to the CFPB.
In December, we discussed how NCUA would retain Truth in Savings - Part 707 for credit unions.
There are also quite a few Federal Reserve regulations that did not transfer to the CFPB. The rationale being that these regulations do not implement the "enumerated consumer laws" and, thus, didn't fall under the CFPB's authority.
Keep in mind that the Federal Reserve retains control over these regulations. Thus, if there is a rule change to Regulation CC, for example, it would come from the Federal Reserve.
One of the gifts that Dodd-Frank gave to all credit unions is the need to look to another regulator for regulatory changes. Which means we have another regulator that, unfortunately, does not have the ability to view the comprehensive regulatory burden put on credit unions by the various regulators.
The Federal Reserve issued a Consumer Affairs Letter that discusses Reg CC and the $200 change from Dodd-Frank.
"Section 1086 of the Dodd-Frank Act amended the Expedited Funds Availability Act to require depository institutions to make the first $200 of funds deposited into an account by certain checks available for withdrawal on the business day after the banking day the deposit is received. Previously, depository institutions were required to make the first $100 available on the business day after such a deposit.
The Federal Reserve Board (Board) recently proposed revisions to Regulation CC, including the changes described above. See 76 Fed. Reg. 16862 (Mar. 25, 2011). While Regulation CC has not yet been finalized, supervised institutions will nevertheless be expected to comply with applicable statutory requirements."
The letter is dated August 15. Which is interesting because the change to $200 became effective July 21, 2011.
These are the types of headaches that do not get captured in any data on regulatory burden.
Have a great weekend! Only two more weeks until football season!
Fear not, the blog will go on. Sarah and I will do our best to keep everyone up-to-date on the latest compliance issues.
You will notice a few changes in the daily blog posts. There will be less Penn State, Steelers, Pirates and Nationals references. But, there will be an uptick in Michigan, Detroit Tigers, Lions and Red Wings mentions as well as Sarah's Ohio State Buckeyes and Cincinnati Reds and Bengals.
In case you were wondering, Anthony's shoes have indeed been sent to Seattle for display.
We have been getting quite a few questions about the upcoming change to $200 under Reg CC. A while back, Anthony hit on the underlying requirement in Section 229.18(e) to provide notice within 30 days of the change (since the change is beneficial to members). But how detailed does the notice need to be and what format does it need to be in?
1. This paragraph requires banks to send notices to their customers when the banks change their availability policies with regard to consumer accounts. A notice may be given in any form as long as it is clear and conspicuous. If the bank gives notice of a change by sending the customer a complete new availability disclosure, the bank must direct the customer to the changed terms in the disclosure by use of a letter or insert, or by highlighting the changed terms in the disclosure.
2. Generally, a bank must send a notice at least 30 calendar days before implementing any change in its availability policy. If the change results in faster availability of deposits—for example, if the bank changes its availability for nonlocal checks from the fifth business day after deposit to the fourth business day after deposit—the bank need not send advance notice. The bank must, however, send notice of the change no later than 30 calendar days after the change is implemented. A bank is not required to give a notice when there is a change in appendix B (reduction of schedules for certain nonlocal checks)."
Credit unions have flexibility when providing the notice - provided the disclosure is clear and provided within 30 days of the change (i.e. by August 21, 2011). The Fed does not require special language to be used in the notice. Rather, the notice should simply describe the change in the credit union's policy.
As for format, a message on a periodic statement would suffice. Similarly, a notice in the credit union's newsletter should work, provided it is sent to all impacted members. A website message alone would be insufficient as it would not be provided to all members (only those who went to the CU's website would see the notice). Of course, a credit union could provide a notice on its website in addition to a notice sent to all members.
Happy Monday, folks. Hopefully, everyone was nice to their favorite "mommies" yesterday.
To the 3 percent of you now swearing out loud because you missed Mother's Day, money, flowers and chocolates can cure many, many things.
CFPB. Forty-four senators told President Obama that they will not consider a CFPB appointment until the structure of the CFPB has changed. (ABA Dodd-Frank tracker.) It seems to me, and plenty of others, that this move improves the odds that President Obama will nominate Elizabeth Warren as a recess appointment.
Bernanke. Recently, Fed Chairman Ben Bernanke said that as the government works to implement Dodd-Frank, regulators must ensure that they issue effective rules that do not needlessly increase costs and regulatory burdens. Really? Mr. Bernanke, you are in charge of the Fed, one of the biggest offenders when it comes to hard-to-follow rulemakings that bury requirements and massively increase costs.
Exhibit one. Two. Three. Four. Five. Six. Seven. Eight. Nine. Ten. You get the point.
Regulation CC. So, the Dodd-Frank change to Regulation CC - the one that bumps the $100 next day availability amount to $200 - when does it become effective? July 21, 2011. Some of you are thinking that you can wait, however, until the Fed finalizes its current Regulation CC rulemaking to comply. Wrong. Surprise, surprise, but the Fed buried this detail into its Reg CC proposal.
Section 1086(e) of the Dodd-Frank Act increases from $100 to $200 the minimum amount of funds deposited by check or checks on a given business day that a bank must make available by opening of business on the next business day pursuant to § 603(a)(2)(D) of the EFA Act. That provision of the EFA Act is implemented in § 229.10(c)(1)(vii) of Regulation CC, and the increase is expected to take effect on July 21, 2011, regardless of whether the Board and the Bureau have amended Regulation CC. See, 76 Fed. Reg. 16,869.
Per § 229.18(e), a bank must provide a change-in-terms notice to existing consumer customers by August 21, 2011.
Remember that under Regulation CC, even if a change is beneficial, such as the upcoming $200 amount, you still have to send out a change in terms notice. You just have to do so within 30 days of the change when it is beneficial.
Mr. Bernanke, I agree - regulators could do a better job of being clear with their regulations. Perhaps this could be exhibit 11.
Upcoming webcast. NAFCU has an upcoming webcast on ways credit unions can prepare for possible losses to their debit interchange income.
Yesterday, Das Fed released a proposal to amend Regulation CC. Dodd-Frank seemingly mandated a proposal, because the law changed the $100 "immediate availability" to $200. In addition, with the death of non-local checks, many parts of Regulation were out of date. The only question was this: Would the Fed tweak other parts of the Regulation.
Dumb question. Of course they did. Sigh.
To encourage electronic collection and return of checks between banks, the proposal provides that a depositary bank would be entitled to the expeditious return of a check only if it agrees to receive returned checks electronically. In addition, the proposal would permit the bank responsible for paying a check to require that checks presented to it for same-day settlement be presented electronically. More generally, the proposal would apply Regulation CC's collection and return provisions, including warranties, to electronic check images that meet certain requirements.
Additionally, due to the faster collection and return timeframes that result from electronic collection and return, the proposal would shorten the safe-harbor period for an exception hold to four business days, which should enable the depositary bank to learn of the return of virtually all unpaid checks before being required to make these deposits available for withdrawal. The proposal also eliminates the references in Regulation CC to "nonlocal" checks. The distinction between local and nonlocal checks is tied to Federal Reserve Bank check processing regions. As of February 2010, the Reserve Banks have ceased operations in all but one of their check processing offices, such that there is now only one check processing region, and all checks are local to each other. Local checks are generally subject to a two-business-day hold period.
As I read this proposal, regulatory burdens would increase, and your ability to hold funds would decrease.
I wish they had issued an ANPR, which allows them to canvass the crowd to see if folks had other ideas on how to improve Regulation CC.
Even though they didn't ask for it, I'd think about looking at your check losses over the past few years. Are credit unions getting pounded with fake cashier's checks, for example? I'd look at that data, organize, and somehow weave it into your comments. You may want to have someone at your credit union start pulling data related losses from bad checks.
NCUA has issued Letter to Credit Unions11-CU-02 and its attachment regarding changes to the March 31, 2011 call report. You know, I wish NCUA would put these two documents together, or at least link to the attachment from the letter. Well, as the saying goes, if you want a job done right, do it yourself. I'd send their letter and its attachment, or my impressive "combined" document, to the person responsible for completing your call report.
Have a great weekend everyone. Mandy is heading out of town to visit her college roommates, leaving me in charge of the dynamic duo. Wish me luck, and wish Mandy a speedy return. Actually, you should probably wish Kate and Briggs luck, and Mandy a very speedy return.
D. What Are the Recommended Minimum Retention Times?
When it comes to recordkeeping, few records have clear-cut requirements. Outside of those documents, credit unions have to make a business decision regarding what to keep and how long. It isn't an easy process, but it is an important one.
Regulation CC. NCUA has released Regulatory Alert 10-RA-11to note that due to Federal Reserve restructuring, there are no longer any non-local checks.
Seminar. You need to register for NAFCU's Regulatory Compliance Seminar by this Friday to take advantage of the early-bird discount of $200. Hey, it's no skin off my nose if you don't decide to attend. We'd love to have you, but I understand that training dollars are not unlimited and that we aren't the only cowboys at this rodeo. But by all means, if you know you will attend, please register by this Friday to save some money. A penny saved is a penny earned, and all that jazz.
NCUA and transparency. NCUA will now create videos of board meetings, complete with a word-for-word transcript of what was said.
Oh, that Reg Reform Law is going to be the end of me.
Buried within the 2,000+page reg reform bill was a simple change. The reg reform law amended the Expedited Funds Availability Act regarding the "first $100" availability provision. That amount has been bumped to $200. And the change is effective as we speak. But Regulation CC has not changed, and it continues to contain the $100 language.
I say it was a "simple" change with a great deal of sarcasm, because such a change likely will require changes to core processor programming, disclosures, websites, and policies. There is no mention of the need for the Fed or CFPB to write regulations to implement the change.
NAFCU contacted the Fed, and this is roughly what we heard.
The Fed will issue new regulations regarding the change to the Expedited Funds Availability Act. The effective date for that provision is whatever date the CFPB officially becomes effective, so the Fed doesn't know exactly when that will be. The Fed is trying to get a better feel for when that date will be before they move forward on Regulation CC, but right now they are looking at two different options.
First, the Fed may wait until they know when the CFPB will go into effect and then update the regulation with an effective date that matches the CFPB. If they just update those changes required by the Act, the Fed indicated that the regulation will have a very short comment period or possibly, none at all.
The second option would be for the Fed to look at some other changes to Reg CC and do a more comprehensive proposed rule encompassing the changes required by the Act as well as other issues the Fed has been looking at. What those issues are were unclear from our conversation.
Keep in mind that this was an informal conversation, and that "things are fluid" in Washington, D.C. For now, though, it does appear the Fed will issue regulations to update Regulation CC based on the reg reform law. So, what to do? It seems reasonable for credit unions to wait until a final regulation is issued that mandates changes to policies, disclosures, etc. That being said, the reg reform law is already effective, including the $200 language. Perhaps the Fed will issue some clarification in the near future to clear things up.
Interchange. Last week, I wrote how another threat to interchange income surfaced during the appropriates process. Well, that threat has ended.
Mortgage fraud. FinCEN has released a report regarding mortgage fraud activity in 2009.
Corporate credit unions. NCUA announced plans to release a three-part series to address the current situation facing corporate credit unions. The complete set is now available.
Editorial warning: Long blog post ahead. Take several sips of coffee now.
Regulation CC was created to place limitations on how long financial institutions can hold deposits. The regulation, however, does provide some flexibility for financial institutions to extend holds in a limited number of situations. One of those holds is the "reasonable cause to doubt collectibility" exception. Let's take a look at this hold, shall we?
In the case of certain check deposits, if the bank has reasonable cause to believe the check is uncollectible, it may extend the time funds must be made available for withdrawal. This exception applies to local and nonlocal checks, as well as to checks that would otherwise be made available on the next (or second) business day after the day of deposit under §229.10(c). When a bank places or extends a hold under this exception, it need not make the first $100 of a deposit available for withdrawal on the next business day, as otherwise would be required by §229.10(c)(1)(vii). If the reasonable cause exception is invoked, the bank must include in the notice to its customer, required by §229.13(g), the reason that the bank believes that the check is uncollectible.
That sounds great, right? If your tummy tells you the check might be problematic, you can slap an extended hold on it, right? Not so fast.
The regulation provides that the determination that a check is uncollectible shall not be based on a class of checks or persons. For example, a depositary bank cannot invoke this exception simply because the check is drawn on a paying bank in a rural area and the depositary bank knows it will not have the opportunity to learn of nonpayment of that check before funds must be made available under the availability schedules. Similarly, a depositary bank cannot invoke the reasonable cause exception based on the race or national origin of the depositor.
Some credit may have been hit hard by bogus cashier's checks. It might be tempting to institute a longer hold on all cashier's checks until you can get a handle on the problem. But this guidance prohibits you from doing so. And what exactly is "reasonable doubt?" The Fed gives several examples. And if you look at these examples, a trend becomes clear. There is some information about that specific check that raises the reasonable doubt.
As always, it is a good idea dive into the Regulation and Staff Commentary for additional details.
NAFCU continues to oppose any independent consumer protection entity with authority over credit unions, as credit unions did not cause this crisis and should not be subject to the additional burden imposed by another regulator. While the bill as proposed has some improvements from the House-passed language, all credit unions would still be subject to rules written by the new consumer financial protection bureau, and credit unions holding over $10 billion in assets would also be subject to the examination and enforcement powers of the new regulator. As the bill is currently written, this $10 billion line is not indexed for inflation. This means that this arbitrary threshold will continue to capture more credit unions as they grow over time.
NAFCU is seeking to increase the $10 billion threshold for examination and enforcement to $50 billion in assets. The $10 billion line arbitrarily splits the credit union industry and leaves some credit unions subject to the examination and enforcement burdens of a new regulator. NAFCU fought against this division when the House Financial Services Committee took up its financial regulatory reform legislation last November, and was successful in its efforts to pass an amendment that increased the $10 billion threshold to $50 billion for paying into the Systemic Resolution Fund used to wind down large financial companies. NAFCU will be seeking to establish $50 billion as the line for consumer protection provisions also, with an adjustment to account for inflation. With the threshold at this level, no credit union will be subject to the additional burden of another regulator's examination and enforcement powers.
One of the most common compliance mistakes is found within Regulation CC. It is the dreaded "first $100." Again, there's wonderful information with in the staff commentary to Regulation CC regarding this requirement. As always, this is what Regulation CC allows. You'll always want to look at your own policy and procedures.
Regulation CC requires that up to $100 of the aggregate deposit by checks not subject to next-day availability on any one banking day be made available on the next business day. The Commentary gives the following examples: If your member deposits $70 in an account by check(s) on a Monday, the entire $70 must be available for withdrawal at the start of business on Tuesday. If $200 were deposited by check(s) on a Monday, this section requires that $100 of the funds be available for withdrawal at the start of business on Tuesday. The portion of the members deposit to which the $100 must be applied is at your discretion, as long as you do not apply it to any checks subject to next-day availability. The $100 next-day availability rule does not apply to deposits at non-proprietary ATMs.
The $100 that must be made available under this rule is in addition to the amount that must be made available for withdrawal on the business day after deposit under other provisions of Reg CC. For example, if a member deposits a $1,000 Treasury check, and a $1,000 local check in an account on Monday, $1,100 must be made available for withdrawal on Tuesday—the proceeds of the $1,000 Treasury check, as well as the first $100 of the local check.
Here's one thing that some forget. You can aggregate all local check deposits made by a member on a given banking day for the purpose of the $100 next-day availability rule. Therefore, if a member has two accounts at your credit union, and on a particular banking day makes deposits to each account, $100 of the total deposited to the two accounts must be made available on the business day after deposit. Credit unions can aggregate deposits to individual and joint accounts for the purposes of this requirement.
If the member deposits a $500 local check, and gets $100 cash back at the time of deposit, you don't have to make an additional $100 available for withdrawal on the following day. Similarly, if the member depositing the local check has a negative book balance, or negative available balance in its account at the time of deposit, the $100 that must be available on the next business day may be made available by applying the $100 to the negative balance, rather than making the $100 available for withdrawal by cash or check on the following day.
The first $100 and exception holds. The "first $100" requirement does not apply during the new account period, nor for the repeated overdraft, reasonable doubt as to collectibility, emergency condition, redeposited checks exception holds.
NAFCU members: The March 2010 Newsletter is now available.
NAFCU's Compliance Team is getting ready for our 2010 Regulatory Compliance School, which takes place March 22-26 at the Gaylord National on the Potomac - just outside DC in Maryland. Steve, Sarah and I will all speak, as will a number of other credit union compliance peeps. The school is a solid event that can really get a new compliance person up to speed. And if you sit for exams, you could become an NCCO. If you haven't checked out our NCCO program, take a look at this. I hope to see many of you there!
Regulation CC applies to accounts. Sure, most folks understand that. But does it apply to all accounts? No, it does not. This comes from the Commentary to Regulation CC.
That's right - it doesn't apply to non-transaction accounts. So, if a member makes a deposit to a savings account or money market account, Reg CC's protections generally do not apply. That being said, keep the following two points in mind.
Some institutions treat nearly all their accounts as transaction accounts - even savings and money market accounts. This is permissible. It allows members to make transfers without Reg D limitations, but it does require the institution to reserve against those accounts per Reg D. You'll want to determine if your credit union does this.
Regulation CC has a mechanism through which the Fed can be asked to determine whether the Expedited Funds Availability Act preempts state laws that govern the availability of deposits. The Fed's determinations are laid out in Appendix F. You need to go through this to find your state, as some States, such as Massachusetts, apply Reg CC's protections to all accounts - not just transaction accounts. And the Fed says that's OK. Here's an example of how the rules in Massachusetts are different.
The Massachusetts statute governs the availability of funds deposited in “any demand deposit, negotiable order of withdrawal account, savings deposit, share account or other asset account.” Regulation CC applies only to accounts as defined in §229.2(a). Regulation CC does not affect the Massachusetts statute to the extent that the state law applies to deposits in savings and other accounts (including transaction accounts where the account holder is a bank, foreign bank, or the U.S. Treasury) that are not accounts under Regulation CC. (Note, however, that under §229.19(e) of Regulation CC, Holds on other funds, the federal availability schedules may apply to savings, time, and other accounts not defined as accounts under Regulation CC, in certain circumstances.) Emphasis added.
NCUA has announced an audio conference to go over its new capital initiative for low-income credit unions. The audio conference will be held on March 4.
The FFIEC, which includes NCUA, has released an updated retail payments system booklet.
The Federal Financial Institutions Examination Council (FFIEC) today issued updated guidance for examiners, financial institutions, and technology service providers on the risks associated with retail payment systems. This Retail Payment Systems Booklet, which is part of the FFIEC Information Technology Examination Handbook series, is an update to the 2004 version that provided guidance on the risks and risk-management practices applicable to financial institutions' retail payment systems activities, including checks, electronic payments related to credit cards and debit cards, and the automated clearing house (ACH). Appendices to this booklet include examination procedures and references to applicable laws, regulations, and guidance.
The revised booklet addresses changes in technology and provides guidance on the Check Clearing for the 21st Century Act of 2004. This booklet also provides expanded guidance on merchant card processing and ACH activities. It provides a more in-depth discussion of the increased risks posed by these activities and some of the risk management tools that financial institutions can use to mitigate them. There is also a brief discussion on emerging technologies in retail payment systems. The booklet includes information on remotely created checks and electronically created payment orders, both of which are being used more frequently as payment devices. Lastly, the booklet addresses remote deposit capture and provides examination procedures for use in conjunction with the FFIEC guidance, Risk Management of Remote Deposit Capture (January 14, 2009).
Now that non-local checks are going bye-bye, we've been getting a ton of questions from people who are taking a close look at Regulation CC for the first time in a while. Here's a fairly common question that we've been getting. How long can we hold local checks for "new accounts?"
During the new account exception period, the schedules for local and nonlocal checks do not apply, and, unlike the other exceptions provided in this section, the regulation provides no maximum time frames within which the proceeds of these deposits must be made available for withdrawal. Maximum times within which funds must be available for withdrawal during the new account period are provided, however, for certain other deposits. Deposits received by cash and electronic payments must be made available for withdrawal in accordance with §229.10. Emphasis added.
Where did I find this? Appendix E to Regulation CC - its Commentary section. There's a TON of useful information there about how Regulation CC works. The Fed did a good job of writing the requirements in narrative form, so the requirements are a bit easier to digest.
We'll tackle more Reg CC issues in the weeks to come. But for now...have a great weekend, everyone!
We've made it to the end of the week. If you told me I would have made it this far on Wednesday, I would have had my doubts. Here are a few thoughts on a few items.
NCUA has its monthly board meeting today. Usually, they post their draft items that they considered on this site by mid-morning.
The Fed has indicated to us that they'll soon issue guidance on the Reg Z "floor" issue. I don't know what it will say, or in what form it will come. Stay tuned.
The most recent "Current Issues in Credit Unions" is available. I'm now a co-host for this information-packed podcast. I do feel like the pig in the parlor, though, when I see all the other legal eagles who co-host. This issue addresses Reg Z, Reg E (ODP), Reg CC, Interest Rate Risk, and the SAFE Act. These things are great, as there's nothing quite like listening to different points of view to hone your own understanding of an issue.
FinCEN has released the latest issue of SAR Activity Review: By the Numbers. NAFCU has produced a nice overview article, which you can read here. And this older blog post shows how you can use this guidance document to freshen up BSA training sessions.
NCUA has released its latest batch of prohibition orders. As I always say, these orders can drive home security training and they also underscore the need for good internal controls and audits.
Representative Barney Frank (D-MA) released this memo on the CFPA. It is a good read for those who think the CFPA, as currently envisioned, is not an issue for credit unions. Because those folks would be mistaken.
Have a great weekend, everyone. You deserve it.
On Monday, the Federal Reserve posted a final rule to announce what appears to be the final consolidation of its check processing centers. As of February 27, 2010 - the non-local check will go the way of the dodo bird and short-shorts on NBA players.
On February 27, 2010, the Reserve Banks will transfer the check-processing operations of the head office of the Federal Reserve Bank of Atlanta to the head office of the Federal Reserve Bank of Cleveland. As a result of this change, some checks that are drawn on and deposited at banks located in the Atlanta and Cleveland check-processing regions and that currently are nonlocal checks will become local checks subject to faster availability schedules. To assist banks in identifying local and nonlocal checks and making funds availability decisions, the Board is amending the lists of routing symbols in appendix A associated with the Federal Reserve Banks of Atlanta and Cleveland to reflect the transfer of check-processing operations from the head office of the Federal Reserve Bank of Atlanta to the head office of the Federal Reserve Bank of Cleveland. To coincide with the effective date of the underlying check-processing changes, the amendments to appendix A are effective February 27, 2010. At that time, there will only be a single check-processing region for purposes of Regulation CC and there will no longer be any checks that are nonlocal. The Board is providing notice of the amendments at this time to give affected banks ample time to make any needed processing changes. Early notice also will enable affected banks to amend their availability schedules and related disclosures if necessary and provide their customers with notice of these changes.
So, take a look at your check hold policy, disclosures and check processing practices in light of these changes.
The Fed has announced the final timetable for its check processing restructuring.
After the 12:01 a.m. ET deposit deadline on Friday, February 26, 20101, the Atlanta Office will no longer accept paper items for processing...If you currently mail paper checks to the Atlanta Office, you should begin mailing those items to the Cleveland Office beginning Thursday, February 25, 2010. Any items mailed to the Atlanta Office after February 26, 2010 will be transported to Cleveland, with credit and availability based on when items arrive in Cleveland.
The FDIC now offers RSS feeds. I find their Financial Institution Letters to be very useful at times. And what is an RSS feed and how can it help you? This video does a great job of filling in the details. Personally, I use RSS feeds and Google Reader to help me keep track of 57 different websites, blogs or government agencies.
I had the honor of participating in the most recent issue of "Current Issues in Credit Unions," the brainchild of Rob Rutkowsky. He's a credit union attorney based out of Cleveland. CICU, as I like to call it, is a periodic podcast that addresses hot legal/compliance issues - all from a credit union perspective. Good stuff, people. Good stuff. Access the good stuff here.
The OTS has issued a "CEO's Letter" on the upcoming changes to RESPA. Access it here. The letter does a great job of providing a 20,000 foot overview of the changes. Perfect for, say...a CEO. Hence the name. But the letter also notes that the OTS is furiously typing away on revisions to its RESPA examination procedures. But it is doing so on an "interagency basis." In other words, NCUA probably is working on the same project. The OTS has updated a portion of the procedures already - the portion that addresses the parts of RESPA that took effect back in January. The rest will follow later. So keep an eye out for that document. Exam procedures are like getting the grading key before the test. In a word: useful. In two words: very useful.
The Fed has issued additional guidance concerning its check processing centralization process. Yesterday, the Fed announced that the Federal Reserve Bank of Cleveland will handle all paper check adjustments, effective October 1, 2009. That's in less than 30 days. (Thanks for the heads up, guys.) Read all about it here.
I've stated this before, and I'll say it again. The Fed at some point will have to re-tool Regulation CC. All checks eventually are going to be local, as the plan is to have 1 check processing center. The local/non-local distinction is getting blurry.
Have a great weekend, everyone. I am on my way to Buffalo, NY today to attend the wedding of a very good friend. And guess what just happens to be taking place this weekend in Buffalo? The Buffalo Chicken Wing Festival. Vegas has the over-under weight gain for me around 7.5 lbs. I'm taking the "over." NAFCU is closed on Monday, so the blog will check back with you on Tuesday.
It may be shocking to some, but not all compliance issues touch upon the Credit CARD Act! With that in mind, here are some things that have been kicking around my inbox that I wanted to share.
Red Flags. The FTC has delayed enforcement of the Identity Theft Red Flags Rule, again. This time until November 1. The delay will give state-chartered credit unions additional time to comply. Federal credit unions? No such luck. Our compliance deadline was, and still is, November 1, 2008.
NCUA Prohibition Orders. NCUA has issued its most recent bunch of prohibition orders. These orders effectively ban individuals who allegedly did bad things from working in our industry. They can be useful training tools to remind folks that the danger of embezzlement always is with us.
Another Reg Z change. On Friday, the Fed published final rules to implement portions of the Higher Education Opportunity Act. The compliance date will be 6 months after the final rule is published in the Federal Register, which should be shortly. For those who do not want to page through the 234 page rule, here's a link to a Fed Press Release that gives a very high-level overview.
Check processing changes. For those involved with Regulation CC and check holds, you've notice a ton of check processing restructuring at the Fed. Here's a Fed document that updates recent changes and gives a view to the future.
Foreclosures and tenants. The FDIC issued a consumer affairs letter to remind banks of a new law that protects tenants from eviction due to foreclosures. If your credit union does real estate lending, I'd give this a read.
I think everyone has a friend who is just hard to keep up with. They date a new person every week. They move repeatedly. They are always on to something new and exciting. When you see that friend, you have to spend the first 15 minutes getting an update on their life.
I feel that way about Regulation Z.
Since publication of the two rules, the Board has become aware that clarification is needed to resolve confusion regarding how institutions will comply with particular aspects of those rules. Accordingly, in order to provide guidance and facilitate compliance with the January 2009 Regulation Z Rule by the effective date, the Board proposes to amend portions of the regulations and the accompanying staff commentary. These proposed amendments are discussed in detail in Section III of this supplementary information. Similarly, elsewhere in today’s Federal Register, the Agencies have proposed to amend certain aspects of the January 2009 FTC Act Rule (FTC Act Proposed Clarifications). Although comment is requested on the proposed amendments, the Board emphasizes that the purpose of this rulemaking is to clarify and facilitate compliance with the consumer protections contained in the final rules, not to reconsider the need for—or the extent of—those protections. Thus, commenters are encouraged to limit their submissions accordingly.
To help you see the proposed changes, the Fed uses symbols. Anything within bolded brackets [example] is getting whacked. Anything inside bolded arrows is a proposed addition.
The Federal Reserve Board has approved amendments to Appendix A of Regulation CC that reflect the restructuring of the Federal Reserve Banks' check-processing operations.
Appendix A provides a routing symbol guide that helps depository institutions determine the maximum permissible hold periods for most deposited checks. On June 20, 2009, the Reserve Banks will transfer the check-processing operations of the Seattle branch office of the Federal Reserve Bank of San Francisco to the Los Angeles branch office of that Reserve Bank. On June 27, 2009, the Reserve Banks will transfer the check-processing operations of the Denver branch office of the Federal Reserve Bank of Kansas City to the Los Angeles branch office and to the head office of the Federal Reserve Bank of Dallas. Effective June 20, 2009, the Board is amending the list of routing symbols in Appendix A associated with the Federal Reserve Bank of San Francisco to reflect the transfer of check-processing operations from Seattle to Los Angeles. Effective June 27, 2009, the Board is amending the lists of routing symbols in Appendix A associated with the Federal Reserve Banks of Kansas City, Dallas, and San Francisco to reflect the transfer of check-processing operations from Denver to Los Angeles and Dallas.
As you are aware, the Federal Reserve is continuing to restructure their check-processing operations. On Monday, the Fed released their most recent change - to the Fourth District - effective October 18, 2008. When the Fed's restructurings are complete, there will only be four remaining check-processing offices: Atlanta, Cleveland, Dallas, and Philadelphia. The result is checks that were considered non-local will become local checks.
" (e) Changes in policy. A bank shall send a notice to holders of consumer accounts at least 30 days before implementing a change to the bank's availability policy regarding such accounts, except that a change that expedites the availability of funds may be disclosed not later than 30 days after implementation." 12 C.F.R. 229.18(e).
The Fed's changes to Appendix A will expedite the availability of member's funds because more checks will be considered local. Thus, a notice would need to be sent no later than 30 days after the effective date of your credit union's policy change. The Commentary to Reg CC also indicates the need to highlight the changes in your policy if you decide to issue a new funds availability policy to your members.
2. Generally, a bank must send a notice at least 30 calendar days before implementing any change in its availability policy. If the change results in faster availability of deposits—for example, if the bank changes its availability for nonlocal checks from the fifth business day after deposit to the fourth business day after deposit—the bank need not send advance notice. The bank must, however, send notice of the change no later than 30 calendar days after the change is implemented. A bank is not required to give a notice when there is a change in Appendix B (reduction of schedules for certain nonlocal checks)." Commentary to 12 C.F.R. 229.18(e). Emphasis Added.
There may be multiple changes that affect your credit union, so you may want to consider complying early to incorporate all the changes in a single amendment to your policy. Another option - consider whether converting to a case-by-case hold policy is appropriate for your credit union given the changes to Reg CC.
I will have the pleasure of moderating NAFCU's September webcast on Remote Deposit Capture. The webcast features Ed McLaughlin, Executive Director and Editor of RemoteDepositCapture.com, who will analyze the remote deposit capture industry and the benefits and risks associated with utilizing this new technology.
If you are looking for detailed background information on the remote deposit capture industry, Southwest Corporate Federal Credit Union recently released a White Paper. Southwest Corporate's press release has information on how to obtain the free White Paper.
Both the webcast and the White Paper could be useful in your strategic growth and long-term planning.

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