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CUNA Comment Letter

Revision of Regulations Governing the Endorsement and Payment of Checks Drawn on the Treasury

June 23, 2003

Mr. Ronald Brooks
Senior Program Analyst
Financial Processing Division
Financial Management Service
Prince Georges Center II Building
3700 East-West Highway, Room 725-D
Hyattsville, MD 20782

Dear Mr. Brooks:

CUNA appreciates the opportunity to respond to the Department of Treasury (Treasury) proposal that would revise regulations governing the endorsement and payment of checks drawn on Treasury. The proposal limits the time Treasury has to reverse final payments; allocates losses for forgeries and counterfeits; and clarifies protest procedures against Treasury decisions. CUNA is a national association that represents more than 90 percent of the state and federal credit unions in the nation.

The proposed rule by Treasury would accomplish the following:

• Provisional Payments. Under the proposed rule, Treasury has a reasonable amount of time to make an initial examination of a check and until that examination is completed, all payments are provision. Treasury has 90 days to make this first examination; after that the Treasury payment will be final. The current rule only requires examination within a reasonable time.
• Liability Treasury will request that it be reimbursed for a final payment on one of its checks where an endorser has breached one of the presentment guarantees listed in the rule. In particular, Treasury will reclaim:
• Checks bearing a forged or unauthorized endorsement;
• Checks that have been materially altered;
• Checks where a party has knowledge that the check bears a forged or unauthorized drawer’s signature; and
• Counterfeit checks that were negligently presented.
• Interception of Checks to Deceased Endorsers. The proposed rule allows some checks to be intercepted, before payment is made when the payer is deceased. The check will be returned to the presenting bank with a notation that the payee is deceased.
• Deadline On Presentment of Treasury Checks. Treasury will not be required to pay any check unless it is presented for payment within one year of its issuance.
• Dispute Procedures for Treasury’s Nonpayment. The proposed rule contains protest procedures regarding when a presenting financial institution may protest Treasury’s decision not to pay on its check. In order to be successful, a presenting bank must provide sufficient, credible evidence that the factual basis for the decision was erroneous.
• Use of Debt Collection by Treasury for Reclamation Debts. The proposed rule revises provisions concerning how Treasury can collect reclamation debts. Reclamation debts are created when Treasury makes a final payment, then discovers the check has a forged or unauthorized endorsement or contains a material defect or alteration. The proposal allows debts to be “offset” against payments due debtors and clarifies the types and amounts of charges, penalties and fees that can be assessed against these debts. Also, the proposal clarifies the rights of any endorser that directly receives a reclamation to protest the reclamation request. The reclamation protest procedures must be exhausted before a civil suit can be filed against the Treasury.
• Use of Powers of Attorney in Endorsing Treasury Checks. The proposed rule revises requirements regarding the use of powers of attorney in endorsing Treasury checks. Among other changes, the Treasury will no longer require use of power of attorney forms specified by the Treasury.

Summary of CUNA's Position

• CUNA supports Treasury's proposal to limit the time for first examination before most payments are final to 90 days, and believes that Treasury should work to shorten this time frame further.
• Treasury should be allowed to request that it be reimbursed for a final payment on one of its checks, even after 90 days, where an endorser has breached one of the presentment guarantees.
• Treasury should provide guidance on what constitutes a reasonable effort to detect a counterfeit check within the rule.
• The one-year deadline for presentment of Treasury checks is reasonable.
• The description of protest procedures for presenting banks is fine; however, Treasury should also set a deadline for responding to these protests.
• CUNA supports the expansion of powers of attorney to include entities other than financial institutions because that expansion may benefit credit union members. Furthermore, although Treasury may eliminate the requirement that its own forms be used, it should keep its forms available to the public.
• Treasury could more clearly states the requirements under its proposal, by adding specific information or a cross-reference to specific information on what constitutes reasonable measures to detect a counterfeit check and by making the power of attorney information easier to understand.

Discussion

CUNA supports Treasury's proposal to establish a definitive time frame for first examinations and believes that a 90-day timeframe is appropriate to investigate most situations. The current rule states that Treasury has a "reasonable amount of time" to conduct examinations. Establishing a 90-day timeframe would allow financial institutions to proceed under a more predictable and stable set of expectations that the current rules, which provide no limit, allow. However, CUNA encourages Treasury to reduce the time it needs for an examination and reduce the period accordingly because Treasury allows itself much more time than is provided by the Uniform Commercial Code. Ultimately, it should seek parity with that statute's deadline.

Treasury should be allowed to request reimbursement beyond the 90-day timeframe for final payment, when a presentment guarantee has been breached. This appears reasonable.

Within its rule, Treasury should provide explicit, published guidance as to the factors that constitute a "reasonable effort" before assigning liability for the improper presentment of a counterfeit Treasury check. Appropriate guidance should include specific criteria for establishing the validity of a Treasury check and should be issued as part of a proposed rule to solicit comment from interested and affected parties. Moreover, Treasury should include within the broader rule either a cross-reference to more specific guidance or an appendix that provides guidance. Treasury could also provide a brochure and training video or an interactive website and a telephone number to ask for additional assistance. More information from Treasury would be to the benefit of all participants in the payment system by providing quicker detection of counterfeit checks.

The one -year deadline for Treasury checks is reasonable and is common within check processing. Under the UCC, checks are "stale" after six months and financial institutions do not have to honor them. However, if this timeframe is to be enforced, then the deadline should be stated on the check.

Treasury clarifies it policies regarding protest procedures. Since Treasury mandates completion of these protest procedures before a financial institution may litigate, Treasury should promise to review and answer a protest within 60 days of receipt of the protest. According to credit unions, Treasury already often completes investigations within 30 days.

CUNA supports the proposed changes regarding the exercise of the power of attorney that allow entities other than financial institutions to exercise the power of attorney and to use forms other than the one Treasury creates. However, since Treasury has specific requirements regarding these forms it should continue to make its version of these forms available to the public as a convenience to the public. Finally, Treasury may want to reorganize this part of its rules because credit unions found this section confusing. In particular, a more thorough explanation of the power of attorney would be helpful.

Conclusion

CUNA commends Treasury for reviewing the liability rules for processing Treasury checks. If you have any questions regarding this comment, then please contact Senior Vice President and Associate General Counsel Mary Dunn or me at 202/ 638-5777.

Sincerely,

Michelle Profit