Check Products National Check Payments Certification. Check Products. Copyright 2016 by the Electronic Check Clearing House Organization

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1 NCP 2017 Exam Cycle Core Training Series Session 9 Check Products Copyright 2016 by the Electronic Check Clearing House Organization NOTICES This training course may provide an introduction to or summary of various aspects of check payments and the legal and rules framework for check image exchange. Responsibility for compliance with image exchange rules, and/or the legal, operational and regulatory requirements applicable to check image exchange, remains at all times with the financial institution participating in check image exchange and/or the individual or company using a check image exchange service. This presentation and the information contained herein is not intended as legal or compliance advice or recommendation to any person or company. This document could include technical inaccuracies or typographical errors and individual users are responsible for verifying any information found in this presentation and related live webinar or webinar playback. Financial institutions should consult with their legal counsel regarding legal and operational requirements applicable to any check image exchange program they may offer orinwhichthey participate. These materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO. Copyright 2016 by the Electronic Check Clearing House Organization (Certain contributed content subject to third party copyrights) 2 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 1

2 NCP Exam Registration Reminder Free ECCHO / NCP study aids upon registration! JumpStart Reading Program Links to all program resources NCP Roadmap Direction on establishing a personalized study plan P.R.E.P. Guide Training guide, glossary of terms, sample exam Question of the Day & Summary New daily question & detailed answer to prior day s question Exam Fees: $400 ECCHO member $500 non ECCHO member Not sure about membership? Check current status at: o Enter financial institution name in search box on left 3 Topics This Session Types of Checks Cashier s Check and Declaration of Loss Overview of Check Products Remote Deposit Capture Check Conversion Common ACH SEC Codes 4 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 2

3 Check Definition Defined in Regulation CC as a negotiable demand draft Defined as Item in UCC Article Item: An instrument that is an order to pay money handled by a bank for collection or payment Checks are eligible for image exchange and creation as substitute check (legal equivalent) Many different types and uses of checks Some examples follow on the next few slides 5 Check vs. Noncash Item Check defined on prior page Noncash item Would be a check, except that: Passbook, certificate or other document is attached Accompanied by special instructions Such as a request for special advice of payment or dishonor Consists of more than a single thickness of paper Except a check that qualifies for handling by automated check processing equipment or Has not been preprinted or post encoded in magnetic ink with routing number of paying bank A foreign item 6 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 3

4 Types of Checks Cashier s check Bank is both drawer and drawee Drawn on a bank and signed by officer/employee of bank on behalf of the bank as drawer Direct obligation of the bank that is used for remittance when payment must be credited immediately upon receipt Example: Real estate transfers, tax payments, etc. Certified check Guaranteed funds Defined in Reg CC Issuing bank takes the check amount from drawer s account and sets aside; Bank will pay upon presentment Note: Used infrequently today Government check Demand draft Drawn by U.S. government on itself (drawn on U.S. Treasury) Drawn on state government or unit of general local government Not payable through or at a bank Generally regarded as checks, even though they are not drawn on a bank 7 Types of Checks Money Order: Draft purchased from financial institution, post office or sales agent to pay a debt or transfer funds Example: Providers include MoneyGram, Western Union and US Postal Service Payable Through Draft: Draft that is payable through a specific bank printed on face of draft, but Drawn on issuer, not the bank: Funds drawn from issuer s account Example: Insurance company issues payable through draft to pay a claim Remotely Created Check (RCC) Defined in Reg CC as check that is not created by the paying bank and does not bear signature of person on whose account the check is drawn (an unsigned draft) Example: Account holder authorizes a payee to draw a check on their account payable to that payee 8 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 4

5 Types of Checks Substitute Check: Negotiable instrument created by Check 21 Act defined in Regulation CC as paper reproduction of an original check that Contains an image of the front and back of the original check; Has MICR line with all information from MICR line of original check; Conforms to X standard; and Is suitable for automated processing Note: Properly prepared substitute check is legal equivalent of original item for all purposes Teller s check Drawn by a bank on another bank Includes checks payable at or through a bank Examples: Bank provides a teller s check for: Customer for account disbursement or interest payment Non customer for remittance purposes such as certain loan disbursement checks Note: Used infrequently today 9 Types of Checks Traveler s Check: Payable on demand, drawn on or payable at or through a bank Requires, as a condition of payment, a countersignature by person whose specimen signature appears on instrument Note: Today, while some institutions still offer physical "cheques, many now offer alternatives such as Visa, MasterCard, Travelex prepaid cards Warrant: Negotiable instrument issued by state or local government agencies Drawn against the state or local government s treasury to disburse funds May be used to pay vendors or other payees and issued with state s unique routing number Registered Warrant: Promise to pay at some point in the future (not a check) Example: State of California issued registered warrants several years ago to pay state s obligations 10 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 5

6 Cashier s Check and Declaration of Loss Guaranteed Obligations Cashier s Check and Teller s Check Guaranteed obligations of the bank Generally cannot place stop payment on these checks Bank may refuse payment under certain circumstances: Alteration or forged endorsement Claim against the payee/presenter Be sure of facts and circumstances Penalties for wrongfully refusing payment (UCC 3 411) May result in claim that includes amount of check; expenses and loss of interest; and consequential damages 12 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 6

7 Claim for Loss, Destroyed or Stolen Cashier s Check Definitions related to claim Claimant: Person who claims right to receive amount of cashier s check (or teller's check, or certified check) that was lost, destroyed, or stolen Declaration of Loss: Statement made under penalty of perjury, that the declarer lost possession of, or had cashier s check stolen or destroyed Obligated bank: Issuer of cashier s check Remitter: Person who purchases instrument from the issuer if instrument is payable to an identified person (payee) other than the purchaser Example: You purchased a cashier s check from your bank and made it payable to a car dealer to purchase a new car 13 Claim for Loss, Destroyed or Stolen Cashier s Check Cashier s Check lost or stolen? What to do? File a Declaration of loss if you, as claimant: Are remitter or payee of the check Lost possession of the check Cannot reasonably obtain possession of check Can declare the loss was not the result of transfer or lawful seizure May assert claim for amount of check if claim: Is received timely, and Provides Obligated Bank, the issuer of the cashier s check, time to act on the claim before actually paying the cashier s check Timing outlined in graphic on next slide 14 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 7

8 Declaration of Loss Timeline Claim enforceable at the later of: Time claim is asserted; or 90 th day following date of check Earliest date enforceable = 90 th day after issue date Claim has no legal effect until enforceable Until enforceable, Obligated Bank may pay the check 3 years = UCC statute of limitations Source: epay Resources 15 Declaration of Loss Claim Holder in Due Course (HIDC) Consideration If cashier s check presented by HIDC, the Claimant must either: Refund payment to the Obligated Bank if check is paid by the bank; or Pay amount of the check to the HIDC 16 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 8

9 Remotely Created Check (RCC) Remotely Created Checks Checks created remotely by a payee, under the authority of the account holder Defined in Reg CC Warranty by BOFD established in Reg CC Claim process through rules and OC 3 Banks and customers manage risk BOFD know your customer Perception all RCCs are fraudulent Publicized cases in recent years with significant enforcement and judgment amounts Examiners have issued updates to regulatory guidance for RCCs over the years 18 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 9

10 Remotely Created Checks Legitimate reasons to create RCCs Created for consumer and corporate accounts RCC uses may include: Pay a creditor Purchase item over the internet ACH administrative return fees Collect return check fees Benefits of Remotely Created Checks (RCCs) Economical Fast clearing Convenient Same day posting 19 Apply Your Knowledge Note: Banks are all ECCHO Members Payee / Company Creates RCC with permission of Drawer to Pay Late Utility Bill to Avoid Late Fee Deposit Remotely Created Check (RCC) Bank A (BOFD) IMAGE Intermediary / Collecting Bank Rule 8 Claim IMAGE Paying Bank Statement Unauthorized Remotely Created Check Drawer Customer Can the Drawer Customer initiate this Rule 8 claim for the Unauthorized RCC? 20 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 10

11 Apply Your Knowledge Note: Banks are all ECCHO Members Merchant Creates RCC with permission of Drawer and Deposits Deposit Remotely Created Check (RCC) Bank A (BOFD) IMAGE Adjustment to Bank A Intermediary / Collecting Bank Rule 8 Claim IMAGE Unauthorized RCC Adjustment Paying Bank Statement Unauthorized Remotely Created Check Drawer Customer Unauthorized RCC: What two ways may be used to handle under ECCHO Rules? 21 Check Products Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 11

12 Check Products Lockbox Services Account Reconciliation Products (ARP) Controlled Disbursements Image Cash Letter (ICL) Remote Deposit Capture 23 Lockbox Lockbox Services Bank or third party receives mail at a specified post office box Processes enclosed remittances Deposits to Payee s account Benefits: May allow for faster collection Information vehicle Payments concentration 24 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 12

13 Lockbox Types of lockbox services Retail Lockbox Characterized by large number of relatively small dollar remittances usually from consumers Wholesale Lockbox Characterized by small to moderate number of large dollar remittances usually from businesses 25 Account Reconciliation (ARP) Account Reconciliation Products (ARP) Product dates back to when banks offered to reconcile customer bank statement Initially banks offered fully reconciled statement of checks paid and deposits made Then banks sorted paid checks in check number order Next customer notify banks of checks written and banks supply statement listing activity, including checks outstanding Goal of product Increase amount of information available Decrease amount of work in company s accounting dept. 26 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 13

14 Account Reconciliation (ARP) ARP Services Provide Wide Range of Reporting Access to reports through automated means Offered for multiple accounts / Schedule defined by customer Daily, weekly, monthly Range of Reconciliation Products Full Reconciliation Customer provides bank data on checks issued Bank matches data against checks cleared Customer receives reconciliation reports including checks paid, outstanding items and exceptions Partial Reconciliation Customer receives report of items paid sorted by customer s instructions Deposit Reconciliation Allows customer to maintain one account Have deposits from multiple business locations 27 Account Reconciliation (ARP) Positive pay type services excellent fraud deterrent products various options available Positive Pay Automatically matches each check presented against list of checks issued Payee Positive Pay Matches payee name from issue file to payee name on check Reverse Positive Pay Bank sends to the company a listing of checks presented, the company compares the information to its internal records CD ROM Products Banks may provide customers with check images via CD Used by customers with large check volumes Banks index images for retrieval process Service eliminates need to store paper checks Reduces difficulty in retrieving checks for research 28 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 14

15 Controlled Disbursement Background Previously known as Remote Disbursement Remote disbursement banks were located in remote areas Took paper checks longer to clear through those locations Customers purchased product to control clearing and to take advantage of maximum presentment float Time from when items were deposited to when they were finally posted Product has changed over time; largely impacted by: Monetary Control Act of 1980 Required Fed to reduce or charge for float incurred Fed office closings: Consolidation of regional processing centers to one office Same Day settlement Image exchange: Industry at 100% image exchange today Speed of check clearing from remote disbursement locations no longer a factor 29 Controlled Disbursement Corporate cash management product Designed to manage cash flow and maximize investments Provides customer with information early each day of total amount of checks that will clear Basic process: Early notification of amount needed in disbursement account Funds to equal total disbursements provided via a funding account Customer can identify excess cash for investments or other needs Early notification is key Money markets active and investment rates attractive in morning Short term investment rates generally move downward late in morning 30 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 15

16 Controlled Disbursement Benefits of Controlled Disbursement include: Reduction of idle balances Customers can invest surplus funds or obtain additional funds, if needed Timely notification of daily account funding need Reduced borrowing costs Manage check clearing risk and/or reduce or eliminate overdrafts Potential fraud reduction with early information to know what items will be posted today against the account 31 Image Cash Letter Forward Collection Image Cash Letter: Digital images of paper cash letter; includes both the MICR data record and the transmitted check images DEPOSIT CHECK IMAGE CASH LETTER IMAGE CASH LETTER CUSTOMER SENDING BANK TRUNCATING BANK (BOFD) RECEIVING BANK PAYING BANK STORE CHECKS Truncation: Stop processing of physical paper item(s) and forward electronic image(s) and MICR data 32 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 16

17 Image Cash Letter (ICL) Image Cash Letter (ICL) File containing digital images of paper cash letter Includes MICR data records, indorsement records and check images Electronic cash letter structure with same general information as paper cash letter Formatted to industry standard X Contains and transports image and MICR data captured from paper check 33 Image Cash Letter (ICL) Used to transmit checks between: Customers and banks Bank to bank including Federal Reserve May be product for corporate/correspondent bank customers for delivery of check deposits to banks ICL: Typically used for significant volume of checks sent to/from banks and processors RDC: Typically used for smaller volumes of checks sent from corporate and consumer customers to the bank Terminology: ICL Some banks use ICL to define a specific product/service offering Most use the term generically 34 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 17

18 Image Cash Letter (ICL) Ideal for companies with centralized in house receipt processing Examples: In house lockbox at utility company Correspondent bank with in house check processing operations Customer has ability to capture/transmit MICR data and check images Banks offering product may: o Require customer to create formatted file or o Provide customer with software to reformat o Accept the data for the bank to reformat 35 Image Cash Letter (ICL) Benefits to customer Reduced transportation costs Reduce or eliminate trips to deposit checks More efficient back office processing Later deposit cutoff time allowing more checks deposited on day of receipt Faster return processing and notification due to faster initial deposits and clearing Secure, private and safe electronic connections with banks Cost savings to the customer Consolidation of operations Consolidation of reconciliation Larger balances in centralized account Elimination of multiple accounts and need to concentrate funds 36 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 18

19 Remote Deposit Capture Service that allows user to scan and transmit scanned images to service provider or bank to electronically deposit for clearing and posting Includes mobile RDC: Photo taken of front/back of check to capture information Purpose: To speed up and electronify the deposit process by truncating paper early in collection process (at customer site) Remote Deposit Capture (RDC) services offered to range of customers: Both corporate and consumer 37 Remote Deposit Capture General Benefits Reduced transportation time and costs Increased processing efficiencies Potential for consolidating relationships Benefits for Customers And Merchants Accelerated clearings and better deposit availability Convenience Enhanced cash flow Reduced return item risk Benefits For Financial Institutions Opportunities to expand customer footprint Ability to offer new products Customers with multiple locations can consolidate deposits into one account Customer can make deposits 24 hours a day 38 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 19

20 Types of RDC Branch Capture Image capture of paper checks at branch location Capture at image enabled ATMs Customer Capture Check captured outside the bank s processing control; includes image capture of paper checks at: Corporate customer s location Consumer customer s location Mobile Capture Photo of front/back of check to capture information Corporate, Consumer or Mobile Regardless the channel or product: Manage risk via Customer selection (KYC) Strong customer agreements Training Staff and customers Will discuss RDC risk in more detail in the Fraud, Risk and Risk Mitigation sessions 39 Remote Deposit Capture Financial Institution decisions may include: Image vs. ACH Vendor choice Support for required training Customer Requirements can include: PC with Internet connection Check MICR scanner Flatbed scanner Mobile (smartphone) Service provider/depository bank 40 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 20

21 Remote Deposit Capture RDC Controls Understand FFIEC Guidance Establish procedures to properly separate, handle and secure physical checks to avoid: Accidentally reimaging the checks Sending imaged check out in a paper cash letter Having checks stolen and mishandled Retention of original truncated checks Decide what to keep and retention period(s) based on risk tolerance 41 FFIEC Guidance FFIEC Federal Financial Institution Examination Council Guidelines issued January 2009 Examination manual issued February 2010 Addresses necessary elements of RDC risk management process in electronic environment Focuses on: RDC deployed at customer location Mobile banking Automated clearing house (ACH) check conversions Review and understand FFIEC Guidance regarding agreements 42 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 21

22 Check Conversion ACH Check Conversion Electronic debit to a consumer s checking account that is initiated via check Converted to an ACH transaction and processed using the ACH Network Governed by Reg E and NACHA Rules and other law May be governed by check law (RCK) Examples covered in this section include: ARC: Accounts Receivable Entries BOC: Back Office Conversion POP: Point of Purchase RCK: Re Presented Check Entries 44 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 22

23 Checks Eligible for Conversion Must contain pre printed serial number Must not have been previously negotiated or voided Have RT, account number and check serial number encoded in magnetic ink Must not contain Auxiliary On Us field Amount of $25,000 or less Less than $2,500 for RCK Be completed and signed by the consumer Required for ARC and BOC POP: Check not required to be completed o Becomes source document and is returned to customer RCK if previously presented: Eligible for no more than two more in paper form (if initial RCK); or Eligible for no more than once in paper; once as RCK if reinitiated as RCK Total of two re presentments allowed Three total presentments 45 Checks Not Eligible for Conversion Contain Aux on us field in MICR line Check payable to a person other than Originator Third party check Draft that does not contain the signature of receiver (demand draft / remotely created check) Obligations of financial institution Cashiers check, official check, money order, etc. Check provided by a lender to access: Credit card account Home equity line or other form of credit Checks drawn on an investment company Government checks (state or local) Check drawn on US Treasury, Federal Reserve Bank or FHLB Checks in foreign currency 46 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 23

24 Check Conversion Authorization Notice Language When you provide a check as payment, you authorize us either to use the information from your check to make a one time electronic fund transfer from your account or to process the payment as a check transaction. For inquiries, please call <retailer phone number>. Note: Need <retailer phone number> for BOC only Notice language comes from Reg E 47 Accounts Receivable Entries (ARC) Enables Originator to convert checks received via U.S. mail or dropbox Single entry ACH debit for payment of goods or services Originator retains the check No destruction timeframe Authorization: Prior to receiving check, Biller must provide notice to customer that receipt of check will be authorization for ACH debit Check will be used as source document MICR line information captured using MICR reader Dollar amount can be key entered Retention: Check is retained by biller Secure storage until destruction 2 year retention of copy 48 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 24

25 Accounts Receivable Entries (ARC) Customer /Receiver notified future utility bill payments may be converted to ACH. Checks Scanned / MICR Data Captured Customer mails the next monthly bill payment to Utility Company/Drop Box Utility Company (Mail or Drop Box) ACH Debit ACH Debit ODFI Originating Depositary Financial Institution ACH Network Operators (Fed or EPN) RDFI Receiving Depositary Financial Institution Customer / Receiver 49 Back Office Conversion (BOC) Allows Originators to convert checks to ACH debits during back office processing Checks accepted at point of sale, or manned bill payment locations Creates single entry ACH debit Authorization obtained via notice and receipt of check Notice prior to the receipt of each check Posted in prominent and conspicuous location AND Copy of notice provided to Receiver at time of transaction Retention: Check is retained by biller Retains source document for back office processing Secure storage until destruction 2 year retention of copy 50 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 25

26 Back Office Conversion Check presented in person at merchant location Merchant/Originator NOTICE must be posted / visible Receipt goes back to Customer MICR Information Captured in Merchant s Back Office (Check scanner) Sent to ODFI Consumer/ Customer ACH Debit ACH Debit ODFI Originating Depositary Financial Institution ACH Network Operators (Fed or EPN) RDFI Receiving Depositary Financial Institution 51 Point of Purchase Entries (POP) Convert check received for goods or services at point of purchase or manned bill pay location Single entry ACH debit transaction Authorization: Originator obtains customer s written authorization Customer may not revoke authorization Copy of authorization, voided check, and receipt must be given to customer Should indicate check will not be processed Retention: Originator keeps copy of authorization 2 years following settlement date 52 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 26

27 Point of Purchase Entries (POP) Check presented in person at merchant location Merchant/Originator NOTICE must be posted / visible MICR Information Captured by Merchant s Point of Sale Device (e.g.; Cash Register) and Sent to ODFI Authorization Signed Check and Receipt handed back to Customer ACH Debit ACH Debit ODFI Originating Depositary Financial Institution ACH Network Operators Electronic (Fed Network EPN) RDFI Receiving Depositary Financial Institution 53 Re Presented Check Entries (RCK) Single entry ACH debit entry replacing paper check after paper check returned for insufficient (NSF) or uncollected (UCF) funds Consumer checks only, under $2,500 Covered by NACHA rules and check law UCC and Reg CC Number of Presentments RCK entry can be presented one or two times If only one previous check presentment o RCK entry can be transmitted twice If two previous check presentments o RCK entry can be sent only once 54 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 27

28 Re Presented Check Entries (RCK) Authorization Originator must provide notice of RCK policy to check writer before receiving check Notice must clearly and conspicuously state terms of RCK policy Notice plus receipt of consumer s check constitutes authorization Copy of check must be retained for 7 years under check law 55 Re Presented Check Entries (RCK) Merchant/Originator Bank of First Deposit / ODFI Paying Bank/RDFI (1) Check Presented to Paying Bank Customer purchases goods Pays with a check (2) Not paid check is Returned (3) (4) NSF check RCK converted to to RCK RDFI (Paying Bank) ACH Network Operators (Fed or EPN) 56 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 28

29 ACH Returns ACH entry that RDFI is unable to post may be returned Reason for return, return codes and return deadlines listed in NACHA rules for all SEC codes ARC, BOC, POP, RCK entries listed this section: May be returned for any valid return reason Timing: Generally, return must be available to ODFI no later than opening of business on 2nd banking day following settlement date Extended Return Timeframe: 60 days o Written Statement of Unauthorized Debit (WSUD) required For list of return reasons for e check conversion SEC codes, see Exhibit 4 in NCP P.R.E.P. Guide 57 Questions 58 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 29

30 Recommended Resources FFIEC References: FFIEC Supplement to Authentication in an Internet Banking Environment Oct 2005: ITS Final% %20%28FFIEC%20Formated%29.pdf FFIEC Supervisory Guidance for Remote Deposit Capture 1/14/2009: FFIEC Retail Payment Systems Feb 2010: booklets/retail payment systems.aspx Regulation CC (12 CFR Part 229): bin/textidx?sid=0ed75d38896a339d9b5189ceb4ebe8b9&node=12: &rgn=div5 NCP P.R.E.P. Guide EXHIBIT 4: ACH Check Conversion and Selected SEC Codes Overview 59 Check Products Thank You! NOTICE This NCPC Program document contains copyrighted materials of its publisher. These materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO Copyright 2016 by the Electronic Check Clearing House Organization Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 30