Regulation CC Part I General Provisions NCP 2020

Regulation CC – Part I General Provisions NCP 2020 Exam Cycle Core Training Series Session 3 Copyright© 2019 by The Clearing House Payments Company L. L. C.

NOTICES This training series is designed to provide information on various aspects of check payments and the legal and rules framework for electronic check exchange. Responsibility for compliance with electronic check exchange rules, and/or the legal, operational and regulatory requirements applicable to electronic check exchange, remains at all times with the financial institution participating in the exchange and/or the individual or company using an exchange service provider. This presentation and the information contained herein is not intended as legal or compliance advice or recommendation to any person or company. Financial institutions should consult with their legal counsel regarding legal and operational requirements applicable to any electronic check exchange program they may offer or in which they may participate. 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. These materials may not be reproduced or published, in whole or in part, without the express permission of The Clearing House Payments Company L. L. C. Copyright© 2019 by The Clearing House Payments Company L. L. C. (Certain contributed content subject to third party copyrights) National Check Payments Certification 2

Exam Registration • Register for exam online with ECCHO and get access to free NCP study aids: – Jump. Start Reading Program – NCP Roadmap: To build a personalized study plan – P. R. E. P. Guide: Training, glossary, quizzes & more – Question of the Day & weekly summary • 2020 exam fees: – $450 ECCHO member / $575 non-member • Not sure about ECCHO membership? Register with ECC store. eccho. org HO fo Check out exam in c cp www. eccho. org/n 2020 Exam: April 18 – May 9 – Contact NCP Program Administration: ncpc@eccho. org National Check Payments Certification 3

P. R. E. P. Guide • Payments Resource and Exam Preparation Guide – 300+ pages of training and study materials including: • Sample multiple-choice exam • Section quiz questions with answer keys • Suggestions for further study (see sample below) National Check Payments Certification 4

Session Topics • Regulation CC Overview • General Provisions – Definitions – Indorsement Requirements – Subpart B Update • Availability of Funds and Disclosures – Substitute Checks National Check Payments Certification 5

Regulation CC – Overview National Check Payments Certification 6

Regulation CC Background Federal Regulation • Establishes provisions in support of interbank check exchange • Issued by the Board of Governors of the Federal Reserve System • Subpart B joint jurisdiction w/CFPB To ensure expeditious return of checks • Implements following Federal legislation: o Expedited Funds Availability Act (EFA Act) o Check Clearing for the 21 st Century Act (Check 21 Act) Recent Updates (2018 -2019 -2020) National Check Payments Certification • Final rules updates eff. Jul-2019 • Presumption of Alteration eff. Jan-2019 • Subpart B inflation updates to availability amounts eff. Jul-2020 7

Reg CC Overview Divided Into four subparts: • Subpart A: ü Authority and Purpose ü Definitions • Subpart B: Funds Availability and Disclosure Requirements ü Joint jurisdiction with CFPB • Subpart C: Definition of electronic checks/electronic return checks ü Paying Bank and Returning Bank Responsibilities ü Depositary Bank Responsibilities ü Role of Rules and Agreements ü Returns ü Indorsements ü Warranties and liabilities • Subpart D: Substitute Checks and Consumer awareness Appendices A – F • Routing Number Guide • Model Disclosures • Commentary National Check Payments Certification 8

Reg CC Overview Reg CC Subpart C – Applies directly to interbank electronic check exchange Rules and Agreements – Establish many terms of exchange: Defers to interbank rules and agreements to establish many terms of exchange • Private sector exchanges – ECCHO Rules • Fed exchanges – Fed OC 3 • Where/when/how electronic checks are delivered • Will bank act as intermediary for exchange/return • Exceptions / variations to Reg CC • Eligibility rules for certain types of checks • Limits on presentments • Terms for exception handling and adjustments National Check Payments Certification Bank-to-customer agreements address customer relationship • Deposits agreements • Remote deposit capture (RDC) agreements 9

General Provisions National Check Payments Certification 10

Bank Definitions • Several definitions of “bank” in this section: – Bank – Collecting Bank – Depositary Bank – Indemnifying Bank – Paying Bank – Returning Bank – Reconverting Bank – Truncating Bank • Term “bank” is used generically to mean a bank, credit union, savings association, etc. • May be a repeat/review of what we’ve covered in a prior session; but – Understanding which “bank role” your FI may be in an exchange can help resolve questions should there be a dispute National Check Payments Certification 11

Bank Definitions Bank • • • Insured bank Mutual savings bank and Savings bank Insured credit union Member; as defined in FHLB Act Savings association Agency or a branch of a foreign bank as defined in section International Banking Act Collecting Bank • Any bank handling a check forward collection, except the Paying Bank Depositary Bank • First bank (depository financial institution) to which a check is transferred even though it may also be the Paying Bank o May be referred to as “BOFD” or Bank of First Deposit National Check Payments Certification 12

Bank Definitions Indemnifying Bank • Bank that provides an indemnity under § 229. 34 with respect to remote deposit capture or an electronically-created item, or • Bank that provides an indemnity under § 229. 53 with respect to a substitute check Paying Bank • Bank by which a check is payable, and to which it is sent for payment or collection; • Federal Reserve Bank or Federal Home Loan Bank by which check is payable; • Bank through which a check is payable, if check is not payable by a bank; or • State or unit of general local government on which a check is drawn and to which it is sent for payment or collection Returning Bank • Bank (other than Paying or Depositary bank) handling a returned check or notice in lieu of return o Also a collecting bank for purposes of UCC 4– 202(b) National Check Payments Certification 13

Bank Definitions Reconverting Bank • Bank that creates a substitute check; or • For substitute check created by a non-bank o First bank that transfers, presents, or returns that substitute check Truncating Bank • Bank that removes the original check from the check collection process; or • If non-bank removes original check from the check collection process, then o First bank that transfers, presents, or returns a substitute check in lieu of original check, or by agreement, information relating to the original check National Check Payments Certification 14

Definition of Terms Account Availability Available for Withdrawal National Check Payments Certification • Deposit accounts at a bank from which the account holder makes transfers or withdrawals by negotiable instrument or other similar means to make payments or transfer funds to third persons o Ex: DDA or share draft accounts • Time from day of deposit until funds are available to account holder for withdrawal or other use o In general, could include funds from a line of credit product as well as funds classified as available balance from cleared and existing deposits • Funds deposited available for all uses generally permitted to customer under the bank’s account agreement or policies 15

Definition of Terms Banking day • Business day on which office of bank is open to public for substantially all banking functions Business day • Calendar day other than a Saturday or a Sunday, or Federal Reserve legal holidays • Banking and business day distinctions are important – Consider timing for returns: Number of days from day of presentment for returns are based on banking vs. business day considerations National Check Payments Certification 16

Reg CC – Definitions Cashier’s Check Definitions • Check that is o Drawn on a bank; o Signed by an officer or employee of the bank on behalf of the bank as drawer; o Direct obligation of the bank; and o Provided to a bank’s customer or acquired from the bank for remittance purposes • Negotiable demand draft o Drawn on or payable through or at, an office of a bank; o Drawn on Federal Reserve Bank or FHLB; o Drawn on U. S. Treasury; • Demand draft drawn on: o State or unit of general local government not payable through or at a bank; • U. S. Postal Service money order; • Traveler's check; and • An original check and a substitute check National Check Payments Certification 17

Definitions Electronic Check Electronic Returned Check • Electronic image and electronic information derived from paper check /paper returned check that: o Is sent pursuant to an agreement between sender and receiving bank; and o Conforms with X 9. 100 -187 standard ü Must have both the image of the item and the MICR line information to meet the definition ü Definition does not include noncash item Electronically-created items • Check-like items created in electronic form that never existed in paper form • Does not meet definition of Electronic check and Subpart C does not apply o Creates new indemnity ü Bank that transfers an image or information that is not derived from a paper check indemnifies each transferee bank, any subsequent bank, the paying bank and any returning bank against any loss, claim, or damage that results from the fact that the image or information was not derived from a paper check National Check Payments Certification 18

Reg CC – Definitions Magnetic ink character recognition line and MICR line Numbers which may include routing number, account number, check amount, and other information that are: • Printed near the bottom of check in magnetic ink in accordance with ANS standards including: – X 9. 13 (X 9. 100 -160) for original check – X 9. 100 -140 for a substitute check – X 9. 100 -187 for an Electronic Check/Electronic Returned Check (for purposes of subpart C and subpart D) National Check Payments Certification 19

Is Magnetic Ink in MICR line Required? • Reg CC requirement – All checks (including substitute check) must have routing number of the Paying Bank preprinted or post-encoded in magnetic ink • However, not required if IRD is created for a paid item returned to the issuing institution’s customer as a properly paid item – MICR characters (E 13 B font) may be printed in nonmagnetic ink (see X 9. 100 -140 § 6. 1) – Substitute check must still conform to all other requirements of X 9. 100 -140 standard National Check Payments Certification 20

Reg CC – Definitions • Noncash item: – Item that would otherwise be a check, except that— • Passbook, certificate, or other document is attached; • Accompanied by special instructions, such as 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 • Not preprinted or post-encoded in magnetic ink with the routing number of the paying bank National Check Payments Certification 21

Definitions Remotely Created Check (RCC) • Check not created by the paying bank • Does not bear a signature applied, or purported to be applied, by person on whose account check is drawn • May say “Signature on File” of other similar language on the signature line • May be referred to as an unsigned draft • Valid RCC must have existed in paper (physical) form prior to imaging Routing Number • Number printed on the face of a check in fractional form or in nine-digit form; • Number in a bank’s indorsement in fractional or nine-digit form; or • Bank-identification number contained in an electronic check or electronic returned check, for purposes of subpart C and subpart D National Check Payments Certification 22

Reg CC – Indorsements Must indorse check in accordance with standards • Requirement for bank (other than paying bank) that handles check forward collection or return Indorsement Standards listed in regulation • Specifications for Physical Check Endorsements o X 9. 100 -111 for paper check other than substitute check • Specifications for Image Replacement Document o X 9. 100 -140 for substitute check; and • Electronic Exchange of Check and Image Data – Domestic o X 9. 100 -187 for an electronic check/electronic returned check Liability of bank handling a check • Liable to any bank that subsequently handles the check to extent subsequent bank does not receive payment for check • Applies whether or not bank has placed its indorsement on the check National Check Payments Certification 23

Reg CC – Indorsements • Indorsement and Holder – After check indorsed by bank, only bank may acquire rights of a holder until — • Check has been returned to person initiating collection; or • Check has been indorsed by the bank to a person who is not a bank – Example: Bank is holding the item but is unable to charge back; may assign the check to a debt collection service • Depositary Bank Indorsement – May arrange with another bank to apply other bank's indorsement as depositary bank indorsement • Used in a centralized return environment – Must avoid area reserved for depositary bank indorsement as specified in indorsement standard • Applicable to check under paragraph (a) of this section – Physical check, substitute check, electronic check National Check Payments Certification 24

Forward Collecting / Presenting / Paying Banks Depositary Bank • Depositary Bank indorsement includes: – ABA routing number bracketed by arrow points (physical) or • Appropriate X 9. 100 -187 electronic record (image) – Bank’s name and location – Indorsement date; May contain optional trace or sequence number National Check Payments Certification 25

Forward Collecting / Presenting / Paying Banks Subsequent Collecting Bank(s) • Subsequent Bank indorsement(s) must include: – ABA routing number without arrow points (physical) or • Appropriate X 9. 100 -187 electronic record (image) – Indorsement date; May contain optional trace or sequence number National Check Payments Certification 26

Forward Collecting / Presenting / Paying Banks Reconverting Bank • Reconverting Bank indorsement based on X 9. 100– 140 standard; Must include: – ABA routing number (without arrows) and asterisk at each end; front of check, outside the image – ABA routing number (without arrow points) and asterisk at each end; back of check – Truncating bank's ABA routing number (without arrow points) and bracket at each end; On front of check, outside the image National Check Payments Certification 27

Payee Indorsement 1. Subsequent collecting bank ENDORSE HERE: X FOR DEPOSIT ONLY FIRST UNION NATIONAL BANK ACCOUNT 1234567890123 NORTH POLE, INC. DO NOT SIGN / WRITE / STAMP BELOW THIS LINE FOR FINANCIAL INSTITUTION USAGE ONLY >031000011< 01/02/2002 7815830233 28 National Check Payments Certification Depositary Bank BOFD 2. Subsequent collecting bank Physical Indorsements Back – Paper Check

Physical Indorsements Front – Paper Substitute Check Creating Institution (*Reconverting Bank*) Truncating Institution [Truncating Bank] ABA routing number, Date & Sequence 1800539446 [053000183] 01/04/2002 Routing Number, Creation Date & Sequence Number Notes: • Creating (Reconverting) bank, Truncating bank and Depositary bank not necessarily the same • Identify each institution as defined in Reg CC Appendix D and X 9. 100 -140 standard National Check Payments Certification MICR Line from Original Check 29

Physical Indorsements Back – Paper Substitute Check (Forward Original IRD) Notes: • Creating Bank (Reconverting Bank): Identified by asterisks (*) on each end of ABA routing number − On front and back of IRD • Truncating Bank: Institution identified by brackets ( [ ] ) on each end of ABA routing number − On front of IRD only National Check Payments Certification 30

Reg CC – Presentment • Presentment & Issuance of Checks (229. 36) – Receipt of Electronic checks – Terms by which paying bank accepts electronic checks governed by agreement between presenting and paying banks • Receipt of Paper checks: Considered received by the paying bank when it is received– – (i) At a location to which delivery is requested by the paying bank; – (ii) At an address of the bank associated with the routing number on the check, whether contained in the MICR line or in fractional form; – (iii) At a branch, head office, or other location consistent with the name and address of the bank on the check if the bank is identified on the check by name and address; or – (iv) At any branch or head office, if the bank is identified on the check by name without address. • Paying bank may require that checks presented be separated from returned checks National Check Payments Certification 31

Reg CC – Same-Day Settlement • Same-Day Settlement [see § 229. 36(d)] – Governs settlement for presentment of paper checks • Settlement for presentment of electronic checks is governed by the agreement of the parties – Paper check is considered presented, and paying bank must settle for or return check if presenting bank delivers check, under delivery requirements established by paying bank, and demands payment: • At a location designated by paying bank for receipt of checks; • By 8 a. m. on a business day (local time) – Paying bank may require same day settlement checks be separated from other forward-collection checks or returned checks – Paying bank accountable to presenting bank for amount of check unless, by the close of Fedwire on business day of receipt, it: • Settles for the amount of the check or returns the check National Check Payments Certification 32

Reg CC – Damages • Damages – Shall not exceed amount of item plus interest compensation and expenses • Tender of defense – May give prior bank in collection or return chain written notice of litigation • Notice of claim – Must be made within 30 days after claimant has reason to know of breach and identity of warranting bank – Warranting bank discharged to the extent of any loss caused by the delay in giving notice of the claim National Check Payments Certification 33

Availability of Funds Next-Day Availability (§ 229. 10) For certain check deposits, depositary bank makes funds available next business day after the banking day on which the funds are deposited for: Check drawn on the Treasury of the United States US Postal Service money order Check drawn on Federal Reserve Bank or Federal Home Loan Bank Check drawn by a state or local government Cashier's, certified, or teller's check Checks not listed above, next day amount available is lesser of: National Check Payments Certification $200 ($225 as of July 1, 2020) or Aggregate amount deposited by check on any one banking day to all accounts of the customer 34

Availability of Funds • Availability schedule (§ 229. 12) – Applies to all local checks • Note: Local vs. nonlocal checks were based on whether the check was payable at a bank in the same check processing region • Restructuring of Federal Reserve Banks’ check processing operations resulted in all checks considered “local” today – Atlanta remaining FRB check processing location National Check Payments Certification 35

Availability of Funds Availability schedule (§ 229. 12) • Two-Day Availability: Depositary bank shall make funds available for withdrawal no later than second business day after the banking day on which checks were deposited in person Extension of Schedule • Applies to certain deposits in Alaska, Hawaii, Puerto Rico, and the U. S. Virgin Islands o Depositary Bank may add one business day for deposits that are: ü Deposited in an account at a branch of a depositary bank if the branch is located in Alaska, Hawaii, Puerto Rico, or the U. S. Virgin Islands; and ü Deposited by a check drawn on a paying bank not located in the same state as the depositary bank Nonproprietary ATMs • Deposits at nonproprietary ATMs, depositary bank must make funds available no later than fifth business day after the banking day on which check was deposited o Example: Deposit is made at a nonproprietary ATM on a Monday, including any deposit by cash or checks otherwise be subject to next-day (or 2 nd-day) availability; o Funds must be made available for withdrawal not later than Monday of the following week National Check Payments Certification 36

Exceptions – Availability of Funds Exceptions Eligible for extended holds New Accounts Deposits into new accounts; Open less than 30 days Large deposits (greater than $5, 000) First $5, 000 covered under normal “availability” reqs Re-deposited checks May be held unless the check was returned because of missing endorsement or postdating Deposits to accounts that are repeatedly overdrawn If during the previous 6 months, account was negative: Reasonable cause to doubt the collectability of a check Must have legitimate reasons Checks deposited during emergency conditions Beyond the control of the financial institution (§ 229. 13 ) National Check Payments Certification Increases to $5, 525 Jul-2020 Remainder of deposit may be held for the extended period Six or more banking days • Two or more banking days in the amount of $5, 000 or more Ex: Natural disasters or communications malfunctions 37

Exceptions – Funds Availability • Extending or delaying funds availability on deposited checks – Reg CC permits financial institutions to delay availability of funds on certain deposits for a “reasonable period of time” – Timing of “reasonable period” beyond the 2 -day availability generally will be: – One (1) additional business day for on-us checks • 3 days total – Up to five (5) additional business days for non-on-us checks • 7 days total National Check Payments Certification 38

Availability Examples Note: Effective July 1, 2020, the “Next Day Funds Availability” amount illustrated here would increase to $5, 525. See updates to Reg CC Subpart B (§ 229. 13) National Check Payments Certification 39

Reg CC – Disclosures • General Disclosures (§ 229. 15): Form of disclosures must be: – Clear, conspicuous and in writing – In a form that the customer may keep; other than those posted: • At locations where employees accept consumer deposits; • At ATMs; and • On preprinted deposit slips – Grouped together and not contain any information not related to disclosures required by regulation National Check Payments Certification 40

Reg CC – Disclosures • General information (§ 229. 16): Disclosures must reflect policy followed by the bank in most cases – Describe information that banks must provide in initial disclosures – Disclosure provided must reflect availability policy followed in most cases • Even though bank may in some cases make funds available sooner or impose a longer delay National Check Payments Certification 41

Subpart B Update National Check Payments Certification 42

Subpart B • Subpart B—Availability of Funds and Disclosure of Funds Availability Policies – § 229. 10 Next-day availability – § 229. 11 [Reserved] – § 229. 12 Availability schedule – § 229. 13 Exceptions – § 229. 14 Payment of interest – § 229. 15 General disclosure requirements – § 229. 16 Specific availability policy disclosure – § 229. 17 Initial disclosures – § 229. 18 Additional disclosure requirements – § 229. 19 Miscellaneous – § 229. 20 Relation to state law – § 229. 21 Civil liability National Check Payments Certification 43

Subpart B – Why Update? • Why Update Subpart B? – Subpart B requires updates due to: • Statutory changes granting the Fed and CFPB shared rulemaking authority • Changes in check processing landscape (e. g. ; elimination of nonlocal checks) and growth in image exchange – Funds availability provisions must be balanced/reviewed periodically in the interest of: • Customers – to receive funds promptly; and • DFIs – to minimize risks from making funds available before learning of returns National Check Payments Certification 44

Subpart B – Proposal and Timeline: • March 2011: FRB requested comment on proposal for Subpart B (regarding funds availability) along with changes to Subpart A, C, D • July 2011: Dodd-Frank Act became effective, providing FRB and CFBP with joint rule-making authority for Reg CC Subpart B • July 2018: Reg CC final rule effective – FRB did not move forward with Subpart B amendments when publishing final amendments to Subparts A, C and D • Nov-2018: FRB and CFPB jointly published proposed rulemaking to Reg CC Subpart B to implement statutory requirements/make technical changes – Agencies re-opened 2011 Subpart B proposal (re: funds availability) for additional comment (due by Feb-2019) • June-2019: Final rule on Regulation CC Subpart B issued – For statutory requirements and technical changes • July 1, 2020: First set of adjustments take effect National Check Payments Certification 45

Summary of Changes to Reg CC Subpart B • Implemented statutory requirements: – Will make Inflation updates to availability dollar amounts – Expanded EGRPCPA coverage to certain American territories: • American Samoa • Commonwealth of the Northern Mariana Islands • Guam • Made certain other technical amendments: – Reflects joint-rulemaking authority of FRB and CFPB over certain EFA provisions (Reg CC 229. 1(a)) – Non-substantive error correction in Reg DD Appendix A National Check Payments Certification 46

Mandated Extension of EFAA • Implemented the EGRRCPA by extending Reg CC funds availability, payment of interest, and disclosure requirements to financial institutions in: – American Samoa – The Commonwealth of the Northern Mariana Islands – Guam • Amends the defined terms “state” and “United States” to include these territories in 229. 2(ff) and 229. 2(jj) • Adds these territories to the list of locations that are eligible for one-day extension of the availability schedules under 229. 12(e) of Reg CC and EFAA • Effective date for these mandated EFAA changes: Sept 3, 2019 National Check Payments Certification 47

Mandated Inflation Adjustment • Under the Dodd-Frank Act, the Agencies are required to adjust the EFAA dollar amounts for inflation – Section 1086(f) and added Section 607(f) to the EFAA • Provides that dollar amounts under EFAA shall be adjusted every five years after December 31, 2011 – Adjusted by the annual % increase in the CPI-W (Published by Bureau of Labor Statistics) rounded to nearest multiple of $25 • Note: Final rule’s inflation adjustments and changes to disclosures will impact all depository institutions—including those with no more than $10 billion in assets National Check Payments Certification 48

Inflation-Adjusted Amounts (eff: July 1, 2020) • Availability amounts – first update: – 229. 10(c)(1)(vii) – minimum amount will be $225 – 229. 12(d) – cash withdrawal amount will be $450 – 229. 13(a) new-account amount will be $5, 525 – 229. 13(b) – large-deposit threshold will be $5, 525 – 229. 13(d) – repeatedly overdrawn threshold $5, 525 – 229. 21(a) – civil liability amounts for failing to comply with EFAA’s requirements will be $100, $1, 100 and $552, 500 • Agencies plan to publish adjusted dollar amounts within Reg CC at least one year prior to date adjustments will take effect – Adjustments effective July 1, 2020 have been published in Federal Register – Anticipate publishing next adjustments in Federal Register in first half of 2024 to be effective July 1, 2025 National Check Payments Certification 49

Notices to Consumer Customers • DFIs required to send written notice to consumer account holders at least 30 days before implementing changes to their funds availability policy [(see Reg CC 229. 18(e)] – Changes to the availability dollar amounts in Reg CC would trigger this notice requirement. • Agencies believe one-year timeframe provides enough time for DFIs to plan/send their change in terms Notices – May provide notices electronically or send notice with the monthly account statement National Check Payments Certification 50

Subpart B: Changes Not Included in Recent Update • 2011 Funds Availability Proposal • Deposits made by customers via RDC – RDC deposits are governed under customer/ account/RDC agreements with depository institution • Does bank need extra time to process and/or learn of nonpayment of RDC items compared to other items? • For more information, see ECCHO document “Reg CC Subpart B Proposal At-A-Glance” found here: www. eccho. org/wordpress/wp-content/uploads/Reg. CCSubpart. BProposal. Ata. Glance. FINAL. pdf National Check Payments Certification 51

Substitute Checks National Check Payments Certification 52

Check 21 and Substitute Check • Substitute check defined Reg CC 229. 2(aaa): Paper reproduction of an original check that: – Contains image of front and back of original check – Bears a MICR line that contains all information appearing in MICR line of original check as issued – Conforms to industry standards (X 9. 100 -140) – Suitable for automated processing same as original • Subpart D provisions for substitute check state substitute check is: – Legal equivalent of original check for all purposes – must accurately represents all information on original check; bear legal legend and must include all indorsements • Identifies both the Reconverting bank and Truncating bank National Check Payments Certification 53

Substitute Check Warranties • Warranties for substitute checks [§ 229. 52] – Financial institution that transfers, presents, or returns a substitute check (or paper copy or image or substitute check) warrants it: • Meets all requirements for legal equivalency – Accurately represents the information from the front and back of the original check and includes the required legend identifying it as legal copy of original check • No double debit (warranty against duplicates) – Not asked to make a payment based on a check that already has paid – See examples for front/back views of forward substitute check on next slides National Check Payments Certification 54

Forward Substitute Check – Front View Original Truncating Institution Routing Number, Date & Sequence Clipped Area Original Scanned Front Image 1800539446 [053000183] 01/04/2002 Legal Legend Creating Institution Routing Number, Creation Date & Sequence Number Optional Area No branding or marketing National Check Payments Certification Substitute Check Identifier MICR Line from Original Check Notes: • Creating, truncating and BOFD Institution is not necessarily the same. • Truncating Institution is not necessarily the BOFD or Return Location; Look at Endorsement on back for Return Location. • Date & Sequence numbers may not be available for Truncating Institution. 55

Forward Substitute Check – Back View National Check Payments Certification 56

Substitute Check or IRD – What’s the Difference? • None! – Image Replacement Document (IRD) is defined in the technical standard X 9. 100 -140 – Substitute Check is defined in Regulation CC which references the X 9. 100140 standard • Reg CC definition for substitute check: – Legal equivalent of original check for all purposes – Contains image of front and back of check – Conforms to industry standards – Suitable for automated processing – Accurately represents all information on original check – Bears the required legal legend – Includes all indorsements and includes identification of party creating it (reconverting bank) National Check Payments Certification 57

Copy and Sufficient Copy • Copy of an original check means any: – Paper reproduction of an original check, including a paper printout of an electronic image of the check, a photocopy of the original check, or substitute check; or – Electronic reproduction of a check that a recipient has agreed to receive from the sender instead of a paper reproduction • Sufficient copy: Copy of an original check that: – Accurately represents all of the information on the front and back of the original check as of the time the original check was truncated; or – Is otherwise sufficient to determine whether or not a claim is valid National Check Payments Certification 58

Check 21 Expedited Recredit 10 Days 120 Calendar Days Paying Bank to make recredit claim to prior bank 40 Calendar Days to make claim 10 Days CLAIM Provide Paying Bank with: Check, Copy RECONVERTING BANK or $$$ CLAIM Provide Consumer with: Check, Copy PAYING BANK Consumer Statement or $$$ Substitute Check For consumer items only – Consumer can make claim within 40 calendar days after receipt of statement with the item 1) Paying Bank must provide Consumer with original check, sufficient copy of original check or recredit within 10 days of claim a) If Recredit Pending Investigation: Provide up to $2, 500 within 10 days of claim; then must recredit remainder to Consumer by 45 calendar days of receipt of claim 2) Paying Bank claim to recover from Reconverting Bank a) Must be made within 120 calendar days of transaction that gave rise to claim 3) Reconverting Bank must provide recredit, original check or sufficient copy by 10 th business day of Paying Bank claim National Check Payments Certification 59

Consumer Awareness – Disclosures • Describe substitute check is legal equivalent of original check and recredit rights / how they apply if consumer believes substitute check not properly charged to account • Disclosure required to consumers who: – Receive paid checks with periodic statements or on an occasional basis – Provide disclosure to consumer customer who requests original or copy or when receives a substitute check at the time of request • Example: Financial institution returns a substitute check to depositing customer (return item for NSF item) National Check Payments Certification 60

Questions National Check Payments Certification 61

Recommended Resources • Regulation CC (12 CFR – Part 229) – Visit Electronic Code of Federal Regulations (e-cfr) website to access all Title 12 Banks and Banking (Chapter II) federal regulations: www. ecfr. gov National Check Payments Certification 62

Regulation CC – Part I General Provisions Thank You! National Check Payments Certification ECCHO | The Clearing House 3710 Rawlins Street; Suite 1075 Dallas, Texas 75219 www. eccho. org Copyright© 2019 by The Clearing House Payments Company L. L. C.