Good afternoon peers! Restrictive Endorsements a Big Part of Regulation CC Changes Image: WikiHow The Expedited Funds Availability Act (EFAA) and the Check Clearing for the 21st Century Act (Check 21 Act), announced in 2014, will have amendments effective July 1, 2018. Learn more, Written By Stephanie Lyon, Senior Regulatory Compliance Counsel, NAFCU. Note that Regulation CC is not the only rule that applies to checks; there may be some applicable state law that provides additional guidance on what constitutes a restrictive indorsement. This special endorsement—known as a restrictive endorsement—is physically written on the check by the customer and indicates that the check in question is for RDC or mRDC deposit only. Because the rule did not specify the exact phrase a credit union should use, it seems that from a Regulation CC perspective, the wording the credit union chooses for its restrictive indorsement requirement will be a risk-based decision for the credit union.
There won't be a blog on the 4th of July but we'll be back to blogging on Friday. Using our previous example, Bank A should’ve required a restrictive endorsement on its RDC check, which specified it as “for mobile deposit only.” Joe receives a check for $1,000, which he initially sends via RDC to Bank A for deposit. Though this might not discourage banks from implementing RDC, it will take an effort to enforce the standard with their customers that use RDC or mRDC.
If Bank B had still accepted the check, Bank A would have the right to file an indemnity claim against Bank B. However, in determining what to require for the restrictive indorsement, it is important to note that only institutions that receive the original check can seek indemnity. As for me, I will be spending my Fourth of July holiday in Belize! For an indemnity claim to go forward, section 229.34(f)(2) essentially requires the original check to be presented. In honor of Independence Day, NAFCU's offices will close at noon tomorrow and reopen Thursday, July 5. Stephanie Lyon, NCCO, NCRM, NCBSO, CAMS, was named regulatory compliance counsel in May 2016 and became a senior regulatory compliance counsel in June 2018.
Finally, NAFCU created a redline of the changes to Regulation CC that may be helpful to understand everything that is now different in the rule. Under this new rule, Bank B can file an indemnity claim against Bank A because Bank B may be unable to charge back funds from Joe’s account. This means that, among other things, credit unions offering remote deposit capture (RDC) technology should have finalized any changes made to their RDC agreements, policies and procedures to ensure the correct restrictive indorsements are placed on these remotely deposited checks.
This significantly shifts the liability toward banks issuing RDC or mRDC as a service. Banks must be aware of the liability this regulation brings, and must take steps to mitigate that risk by changing their RDC or mRDC agreements to require restrictive endorsements as soon as possible. The new ruling states: “a bank that transfers a substitute check indemnifies any subsequent recipient against any loss the recipient incurs due to the receipt of a substitute check instead of the original check.”. Information Security and Compliance Services. In this role, Lyon helps credit unions with a variety of compliance issues and also writes articles for NAFCU publ, Providing credit unions with the best federal advocacy, education and compliance assistance in the industry, © 2020 National Association of Federally-Insured Credit Unions, Restrictive Indorsement Requirements for RDC Checks; Closed for Independence Day, CECL Study: Alternatives, Impacts, Accuracy, and Complexity, Stephanie Lyon, NCCO, NCRM, NCBSO, CAMS, Senior Regulatory Compliance Counsel, NAFCU, FDCPA Series Part II: CU Impact, Communications & Future Bureau Interpretations, http://www.youtube.com/user/NAFCUtv?feature=g-all-u. But what exactly is the correct restrictive phrase to use for a remotely deposited check? With the effective date for the Reg CC changes quickly approaching, would anyone be willing to share whether or not your bank is going to require a restrictive endorsement for checks that are being deposited through RDC or mRDC. Final Regulation CC does not specifically defines what constitutes a restrictive indorsement. This special endorsement—known as a restrictive endorsement—is physically written on the check by the customer and indicates that the check in question is for RDC or mRDC deposit only. For example, if a credit union and a bank both accept a check via RDC, neither the credit union nor the bank may seek indemnity because neither received the original check. However, Joe then proceeds to deposit the physical check at Bank B. As these are just examples, other indorsements may also be sufficient so long as it shows the member's intent to deposit the check remotely and not physically. The Federal Reserve Board finalized a new indemnity to address the allocation of liability when a depository bank accepts a check deposit through remote deposit capture—that is, when the depositor sends the bank electronic information about a check, such as a photographic image—which the bank uses to create an electronic check or substitute check for collection. Curious what verbiage you plan to or have added/updated to your mobile banking agreements regarding restrictive endorsements.
We'd like to reject all deposits that are not endorsed correctly, and I'm playing around with language - has anyone already worked this out?
Added* (Trying to understand what your contract/agreement will say, not the endorsement … A new regulation has surfaced that will directly affect banks providing RDC (remote deposit capture) and mRDC (mobile remote deposit capture) as a service to their customers. This new regulation allows financial institutions that offer RDC or mRDC services to protect themselves by requiring specific endorsements on their customers’ deposited items. To summarize, a credit union that accepts remotely deposited checks can be liable to another financial institution if the original check is deposited in that financial institution and the check does not bear the appropriate restrictive indorsement. COVID-19 UPDATE: NAFCU is meeting daily to discuss the impact of coronavirus on our industry. It may be possible that some states requires "for mobile deposit only at [Credit Union's Name]” to meet the definition of a restrictive indorsement, but it may also be possible that stating that this is "for remote deposit only" or "RDC deposit" should signal to a financial institution the item being deposited in person is not supported by the restrictive indorsement. This means that, among other things, credit unions offering remote deposit capture (RDC) technology should have finalized any changes made to their RDC agreements, policies and procedures to ensure the correct restrictive indorsements are placed on these remotely deposited checks.
For example, the model UCC defines a restrictive indorsement as "an indorsement limiting payment to a particular person…" and bears a signature. CSI is a full-service technology and compliance partner. And with a due date of July 1, 2018, adherence to this new regulation is coming up fast. Find the latest developments and resources on our website. Are you looking for the edge to outperform the competition?
This seems to indicate that the credit union's name should be listed in the indorsement to meet the definition of a "restrictive indorsement" under the UCC.
(i.e. The answer to this question is twofold as checks are regulated by federal and state laws. As not all states have adopted the exact language of the model UCC, a credit union may want to check its state's law to determine the applicable requirements for restrictive indorsements. Let’s use this example: a single customer (Joe) holds accounts at both Bank A and Bank B. Using our previous example, Bank A should’ve required a restrictive endorsement on its RDC check, which specified it as “for mobile deposit only.” If it had, the trained teller at Bank B would have seen the restrictive endorsement and wouldn’t have accepted the check for deposit. Steve Shoulta, CSI Director of Regulatory Compliance. In the preamble to the final rule, the Federal Reserve Board explains that "for mobile deposit only" is an example of a restrictive indorsement that should raise a red flag to the financial institution accepting the original check. So what exactly constitutes a “restrictive endorsement?” Although Regulation CC does not give exact language on what should be used, certain portions of the official regulation use the examples of “for mobile deposit only” and “for mobile deposit at Depository Bank A only.” In this scenario, Bank A offers RDC as a service to its customers, while Bank B does not. Members of NAFCU can access it here. If the original check presented bears a restrictive indorsement, this should alert the financial institution accepting this check that it may have been presented for payment already by other means. For those reasons, credit union that are unsure whether their current RDC agreements, policies and procedures protect the credit union from liability, may want to consider reaching out to a local attorney for an opinion on what the restrictive indorsement must include in your state. The commentary provides another example: "for mobile deposit at Depositary Bank A only."
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