CUNA Regulatory Comment Call


May 12, 2003

Proposed Changes in Liability Rules for Treasury Checks

EXECUTIVE SUMMARY

The Department of the Treasury (“Treasury”) published in the Federal Register a proposed rule that would revise its 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’s decisions. The most important changes to the rule include the following amendments:

  • 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 provisional and can be reversed. Treasury has 90 days to make this first examination; after that the Treasury payment will be final. The current rule only requires first examination to occur 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 (i.e., the reclamation debtor has failed to make all reasonable efforts to ensure that a check is an authentic Treasury check and not a counterfeit checks).

  • Interception of Checks to Deceased Endorsers. The proposed rule allows some checks to be intercepted, before payment is made, when the payer is deceased. In these cases, 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 changes the procedures that Treasury can use to collect reclamation debts. Reclamation debts are created when Treasury makes a final payment, then discovers the check does not meet a presentment warranty (e.g., has a forged or unauthorized endorsement or contains a material defect or alteration, etc). The proposal allows the Treasury to “offset” this reclamation debt against payments that are due to the reclamation debtors. The proposal also clarifies the types and amounts of charges, penalties and fees that can be assessed against reclamation debts as well as the rights a direct endorser may have to protest a reclamation. These 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.

  • Comments regarding these proposed changes must be submitted to the Treasury on or before June 23, 2003.

Please feel free to fax your responses to CUNA at 202-638-7052 by June 12; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com and to Assistant General Counsel Michelle Profit at mprofit@cuna.com; or mail them to Mary and Michelle in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004-2601. You may also click the link below for a copy of this comment request http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/2003/pdf/03-9998.pdf

BACKGROUND

Treasury published a notice of proposed rulemaking (NPRM II) that supersedes a previous NPRM issued on May 30, 1997 (NPRM I). NPRM II addresses all of the issues discussed in NPRM I, as well as a few issues not previously raised. It also incorporates the substance of a previous interim rule on debt collection techniques, and codifies existing procedures that allow presenting banks to protest Treasury decisions to decline final payment of checks. The proposal also clarifies that the reclamation protest procedures must be exhausted before a civil suit may be filed against Treasury.

Federal law, not the Uniform Commercial Code applies to Treasury checks. Treasury checks are governed by Federal Statutes, FMS regulations promulgated in Part 240 pursuant to 5 U.S.C. 301, 32 U.S.C. 321, and 31 U.S.C. 3328(e), and, if these statutes are silent then federal common law applies.

NPRM II outlines the responsibilities of the parties’ involvement in the endorsement and payment of Treasury checks. Under the proposal, payees or subsequent endorsers of Treasury checks must present such checks for payment within one year of a check’s issuance. Moreover, under the current proposal, if Treasury decides to decline payment on a check, it must do so on first examination, which must occur within a reasonable amount of time not to exceed 90 days. All payments are provisional until first examination is completed. Currently, Treasury has a reasonable amount of time to make such examination and to refuse payment of any check, with no time limit.

Despite this rule, Treasury may demand repayment even after 90 days and the final payment has been made in those cases where an endorser has breached one of the presentment guarantees listed below:

  • That all prior endorsements are genuine.
  • That the check has not been materially altered.
  • That the guarantors have no knowledge that the signature of the drawer is forged or unauthorized.
  • That the guarantors have made all reasonable efforts to ensure that a check is an authentic Treasury check, not a counterfeit check.

After final payment, Treasury will not demand repayment on a check bearing a forged drawer’s signature if the reclamation debtor had no knowledge that the drawer’s signature was forged or unauthorized. If a check bears both a forged drawer’s signature and a forged endorsement, then Treasury will not demand repayment of the check.

After final payment, Treasury will not reclaim on a counterfeit check unless the reclamation debtor has failed to make all reasonable efforts to ensure that a check is an authentic Treasury check and not a counterfeit check. Treasury will provide further guidance regarding what constitutes a reasonable effort to determine authenticity. However, Treasury believes that financial institutions must verify specific security features as part of its reasonable efforts. For instance, a depositary bank must verify that there is a Treasury watermark on a Treasury check because Treasury will reclaim a counterfeit check that does not have the watermark security feature. When Treasury determines that a reclamation debtor has failed to make reasonable efforts to determine authenticity, the basis for Treasury’s claim would be a breach of the guarantee of authenticity.

The proposed rule contains procedures to intercept a check after a payee’s death before payment on the check has been made. The check will be returned to the presenting bank with a notation that the payee is deceased. Under these procedures, the intercept will take place in institutions where an agency has advised Treasury via an unavailable check cancellation (UCC) that the payee is deceased and not entitled to the payment. Checks associated with such payments will be intercepted on presentment to a Federal Reserve Processing Center. The check will be stamped with a legend and will be returned unpaid before financial institutions are required under Federal Reserve Regulation CC to make funds permanently available to their depositors. This rule codifies procedures that already have been implemented and which should result in fewer payments to non-entitled payees. If the UCC is received after the check has been presented for payment, Treasury will recover the funds associated with the payment from financial institutions through the reclamation process.

If reclamation debts arise because a presentment guarantee was breached, then Treasury will send a demand letter to the party requesting a refund. This letter is followed by collection of interest, late payment penalties and administrative collection costs. The proposed rule also clarifies that reclamations are due on the reclamation date. This continues current Treasury policy, which is not stated explicitly in the current regulations.

This section is revised further to clarify the types of charges that will be added to the reclamation amount, when those amounts will accrue, and how the amounts will be calculated. According to the rule, Treasury policy is to add such costs in accordance with 31 U.S.C. 3717, and the Federal Claims Collection Standards (FCCS) (31 CFR 901.9). Treasury waives administrative costs during the first days following the date of delinquency based on a determination that collection of administrative costs during the first 60 days following the reclamation date would be inequitable. This policy provides endorsers with a reasonable amount of time to consider the reclamation or protest. For the same reasons, Treasury will apply the same policy to interest and penalties, except those penalties will be waived for the first 90 days following the reclamation date. The revised policy provides that: (1) Interest begins accruing at the rate determined under 31 U.S.C. 3717 on the 61st day following the reclamation date; (2) penalties calculated at not more than 6 percent of the outstanding balance, begin accruing on the 91st day following the reclamation date; and (3) administrative costs begin accruing on the 61st day following the reclamation date.

After the initial demand letter, Treasury conducts the following procedures: it sends at least three monthly interest billing statements that include outstanding balances and notices of subsequent collection actions; it refers the bill to other federal agencies for administrative offset; and, finally, it takes any other necessary actions if those steps fail. Usually, if the “reclamation debtor” fails to respond to the demand letter, then Treasury will collect the debt by reducing, or “offsetting,” any other federal payment due to the reclamation debtor with the amount owed.

Treasury can collect from financial institutions presenting Treasury checks to the Federal Reserve for payment by the United States. Treasury will direct a Federal Reserve Bank to withhold credit from such presenting banks and, instead, use the funds to satisfy a presenting bank’s debt to the Treasury. By presenting Treasury checks for payment, presenting banks are deemed to authorize this offset.

In the event that all efforts to collect an unpaid reclamation are unsuccessful, Treasury will terminate collection action on the unpaid balance of the reclamation (including unpaid interest, administrative costs, and penalties), and the unpaid balance will be reported to the Internal Revenue Service as discharged indebtedness in accordance with 26 U.S.C. 6050P.

The current rule does not include provisions relating to protest of Treasury decisions to decline payment of a check. The new protest provisions for declinations formalize procedures that allow a presenting bank to protest a declination and, under certain circumstances, to receive back the original amount of the check issued by Treasury. In order to do so, however, a presenting bank must be able to provide sufficient, credible evidence that the factual basis for the declination was in error. For example, if Treasury declined payment of a check because Treasury determined during first examination that the amount of the check had been altered form $400 to $4,000, the presenting bank, to succeed in its protest, would have to provide sufficient, credible evidence that the check, in fact, was issued in the amount of $4,000. This regulation also clarifies that only the presenting bank may file protests, not other endorsers of the check.

The current reclamation procedures and protests provide that a presenting bank may file a protest within 90 days of the reclamation date. The protest will be reviewed by a division director or an authorized designee, neither of whom was involved in the initial determination of fraudulent endorsement or alteration of the check. During this time, Treasury will refrain from collection by means of administrative offset while a timely protest is being considered. This proposal keeps these procedures and adds clarification regarding current practices to the rules. Specifically, the proposal clarifies the rights of any endorser that directly receives a reclamation (i.e., the “reclamation debtor”), including, but not limited to: (1) The right to inspect and copy Treasury records relating to the reclamation; (2) the right to protest the reclamation; and (3) the right to seek a repayment agreement. Treasury also continues its policy that it will not consider protests received more than 90 days after the reclamation date. In addition, the monthly statement will provide notice that Treasury intends to collect the debt though administrative offset if the reclamation debt is not paid within 120 days of the reclamation date. The proposal also clarifies Treasury policy that only the recipient of the reclamation, the “reclamation debtor,” may file protests. Protests by an endorser that was not the direct recipient of a reclamation will be accepted only where authorized by law. The rule also requires that protests by the reclamation debtor be filed and a final determination on the protest be issued by Treasury before the reclamation debtor may file a civil lawsuit in relation to Treasury’s reclamation action on the check.

In addition, NPRM II expands the use of power of attorney as a basis for negotiating Treasury checks by allowing them to be used in more instances, and by eliminating the requirement that a specific Treasury power of attorney form be used. The proposed rule expands the availability of special powers of attorney by allowing such powers of attorney to be executed in favor of any entity or individual, rather than only financial institutions. However, as is current practice NPRM II provides that special powers of attorney may be utilized only if they specifically state that they are not being executed with the intent of assigning the right of payment to the attorney-in-fact or to any other person. Also, the proposed rule allows durable special powers of attorney and springing durable special powers of attorney to be used to negotiate classes of checks the right to which expires on the death of the payee/beneficiary. This includes checks for recurring benefit payments. A durable special power of attorney is a power of attorney that explicitly provides for its continued effect despite the later incompetence of the principal. A springing durable special power of attorney is similar to a durable special power of attorney in that it survives the principal’s incompetence, but differs in that it does not become effective until the principal is determined to be incompetent. The principal creates a springing durable special power of attorney and uses words explicitly stating that the power of attorney is to become effective on a determination that the principal is incompetent. The proposed rule allows durable special powers of attorney and springing durable special powers of attorney to be used for a period of six months following the date that a payee/beneficiary of a check is determined to be incompetent.

These new provisions are intended to serve as a six-month bridge from the time a payee/beneficiary is determined to be incompetent until a guardian or other fiduciary is named. As with special powers of attorney, springing durable special powers of attorney may be executed in favor of an individual, a financial institution or any other entity as attorney-in-fact, but must state that they are not given to carry into effect an assignment of the right to receive payment, either to the attorney-in-fact or to another person. Durable special powers of attorney and springing durable special powers of attorney automatically are revoked, for purposes of negotiating Treasury checks, on the death of the payee beneficiary.

The proposed rules deletes the prior requirement on using the various Treasury power of attorney forms, but requires such forms to include the limitations set in the proposed rule. Individual powers of attorney now will be governed by applicable law to the extent that such powers of attorney are consistent with the limitations provided in this rule. The limitations include the following: (1) that special powers of attorney, durable special powers of attorney, and springing durable special powers of attorney must include a recitation that the power of attorney is not executed to effect an assignment of the right to receive payment either to the attorney-in-fact or to any other person; and (2) that for purposes of negotiating checks covered by this rule, all powers of attorney automatically are revoked on the death of the beneficiary of the check.

QUESTIONS REGARDING THE PROPOSAL

  1. Does your credit union support Treasury’s time frame that allows 90 days for first examination before most payments are final? If not, what time frame is more appropriate? According to Treasury, Treasury is able to complete first examination on most checks in less than 30 days, and has been able to reduce the amount of time necessary to complete first examination in problem cases from 150 days to 90 days.









  2. Should Treasury 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?









  3. How should Treasury provide guidance on what constitutes a reasonable effort to detect a counterfeit Treasury check? In the proposal, Treasury states that it will provide guidance in the future, but it provides only one example of what a reasonable effort must include.









  4. Is the deadline for presentment of Treasury checks reasonable? Treasury will not be required to pay any check unless it is presented for payment within one year of its issuance.









  5. Do you agree with the new protest procedures for presenting banks that Treasury attempts to reclaim from?









  6. Do you think Treasury should set a deadline for its review under these procedures? If so, what should the deadline be? Treasury will only consider protests filed within 90 days of the reclamation date. And, Treasury requires completion of this procedure before a presenting financial institution may file in court.









  7. Do you agree with the proposed changes that allow entities other than financial institutions to exercise the power of attorney? Please explain. The proposed rule expands the availability of special powers of attorney by allowing such powers of attorney to be executed in favor of any entity or individual, rather than only financial institutions.









  8. Do you agree with Treasury’s elimination of its own forms for power of attorney?









  9. Do you recommend any other changes to the proposal?









  10. Has Treasury organized the material in the rule to suit your needs, and are the requirements in the rule clearly stated? If not, what else could Treasury do to make the proposed rule easier to understand?









  11. Please submit your address and phone number.









Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com
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