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CUNA Regulatory Comment Call

March 16, 2005

EXECUTIVE SUMMARY

• The Federal Reserve Board issued a proposal to amend Regulation CC that would define “remotely created checks” and create transfer and presentment warranties for these checks.
• The proposal defines a remotely created check as a check that is drawn on a customer account at a bank¹, is created by the payee and does not bear a signature in the format agreed to by the paying bank and the customer.
• The Board proposes to create transfer and presentment warranties that would ultimately shift liability for the loss created by an unauthorized remotely created check to the depositary institution.
• Comments are due to CUNA by April 18, 2005. Comments are due to the Federal Reserve Board by May 3, 2005.

Please feel free to fax your responses to CUNA at 202-638-7052; or e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Lilly Thomas at lthomas@cuna.com; or mail them to Mary or Lilly c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. You may also access the proposed rule here.

BACKGROUND

Remotely created checks are used when a checking account owner authorizes a payee to draw a check on his or her account, but does not sign the check. Remotely created checks are also called “telechecks,” “preauthorized drafts,” and “paper drafts.” Instead of a signature, the check typically has the customer’s printed or typed name, or bears a statement that the customer authorized the check.

Currently, a remotely created check is subject to Articles 3 and 4 of the Uniform Commercial Code (UCC). The provisions of the UCC reflect that drawees of checks must bear the economic loss when the checks are not properly payable because the drawer did not authorize them. This is because the paying institution, not the depositary institution, is in the best position to judge whether the signature on the check is the authorized signature of its customer². However, remotely created checks do not have a signature to compare.

Because of this, revisions to Articles 3 and 4 of the UCC were approved to address remotely created checks. The UCC revisions define a remotely created check and require a person that transfers a remotely created check to warrant that the person on whose account the check is drawn authorized the check in the amount for which it is drawn.

Fourteen states have amended their Articles 3 and 4 to include similar provisions to those in the UCC; however, no state has adopted the UCC revisions in their entirety and the revisions that were adopted are not uniform. This makes it difficult when remotely created checks are collected across state lines because the institution that presents a check may not be subject to the same rules as the paying institution.

DISCUSSION

The Board’s proposal defines a remotely created check as “a check that is drawn on a customer account at a bank, is created by the payee, and does not bear a signature in the format agreed to by the paying bank and customer.” This definition is different than the UCC definition because this definition would include remotely created checks drawn on either a consumer or a non-consumer account.

Under the proposal, any institution that transfers, collects, or presents a remotely created check would warrant that the person on whose account the check is drawn authorizes the check according to all of its terms.

The transfer and presentment warranties would apply only to institutions and would shift liability to the depositary institution. Under the proposed rule a paying institution would not be able to assert a warranty claim directly against the nonbank payee that created or transferred an unauthorized remotely created check, but would have a claim under other law. This is different than the UCC provisions, which apply to anyone that transfers a remotely created check. The proposed warranties also cover all of the terms of the check, which is different than the UCC provisions, which cover only authorization of the check issuance in the amount of the check.

1. The proposal defines remotely created checks as “a check that is drawn on a customer account at a bank, is created by the payee, and does not bear a signature in the format agreed to by the paying bank and customer.” Do you agree with this definition? Please discuss any aspect of the definition you disagree with.
   
   

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2. Do you agree with the scope of the proposed transfer and presentment warranty?
   
   

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3. Is there a way to distinguish remotely created checks, to which the proposed warranty would apply, from other fraudulent checks? If so, please describe.
   
   

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4. The Board has suggested identifying remotely created checks by assigning digits in the External Processing Code Field (Position 44) of the MICR line to the checks. Four digits may be necessary to distinguish between a forward and return original version and substitute check version. Do you agree with assigning digits on the MICR line? Please explain.
   
   

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5. Please comment on the prevalence and uses of remotely created checks in your credit union.
   
   

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6. Please comment on the general characteristics of remotely created checks, including the manner by which these checks typically reflect the account-holder’s authorization.
   
   

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7. Do you believe it is appropriate to cover all remotely created checks, or should only remotely created consumer items be covered as in the UCC?
   
   

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8. The Board would like comments on whether a different approach to addressing the risks associated with remotely created checks is more appropriate. The Board has provided two alternatives and would like comment on them.
   • Extension of the Midnight Deadline – The rule could potentially allow a paying bank to return an unauthorized remotely created check through the check system by extending the UCC midnight deadline for an extended period of time, such as 60 days. This would reduce the cost of recovering losses and is similar to the return scheme for unauthorized ACH transactions, but may delay finality of payment and discharge of the underlying obligation.
   • Adoption by State Legislatures of the UCC Amendments – The Board could refrain from or delay acting on the remotely created check issue and allow the states to adopt the UCC warranty on their own. Please comment on these alternatives. If you favor an alternative, please explain your preference.
   
   
   

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9. Other comments?
   
   

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¹The definition of the term “bank” in Regulation CC includes any insured credit union.
²The UCC provisions reflect the case of Price v. Neal, 97 Eng. Rep. 871 (K.B. 1762).