Are You Really Ready For Remote Deposit Capture?

June 8, 2017 at 9:28 am 1 comment

One of my compliance pet peeves has been the rush to embrace remote deposit capture without a clear framework for apportioning liability. “Check 21” authorized “substitute checks” which are truncated electronic images of paper checks that are treated as real checks. The idea was to speed up settlements between banks.   At the time no one envisioned a world in which your average consumer would have the ability to create electronic images with a smartphone. As a result, what happens if a credit union receives a deposit of an original paper check that was returned unpaid because the check was previously deposited using a remote deposit capture service and paid?

So I was pleasantly surprised that the Federal Reserve finally approved regulations slated to take effect in July 2018 which updated regulation CC for the new century. There is a lot of important stuff in here so in the coming weeks I will be periodically highlighting some key changes as well as an additional proposal the Fed is seeking comment on. Remember this impacts your credit union irrespective of its size.

A new section 229.34 addresses this precise issue and I’m quoting extensively from the accompanying commentary:

“Depositary Bank A offers its customers a remote deposit capture service that permits customers to take pictures of the front and back of their checks and send the image to the bank for deposit. Depositary Bank A accepts an image of the check from its customer and sends an electronic check for collection to Paying Bank. Paying Bank, in turn, pays the check. Depositary Bank A receives settlement for the check. The same customer who sent Depositary Bank A the electronic image of the check then deposits the original check in Depositary Bank B. There is no restrictive endorsement on the check. Depositary Bank B sends the original check (or a substitute check or electronic check) for collection and makes funds from the deposited check available to its customer. The customer withdraws the funds. Paying Bank returns the check to Depositary Bank B indicating that the check already had been paid. Depositary Bank B may be unable to charge back funds from its customer’s account. Depositary Bank B may make an indemnity claim against Depositary Bank A for the amount of the funds Depositary Bank B is unable to recover from its customer.”

Does all this mean that you are at the mercy of your member? Not entirely. The commentary goes onto explain that if the original check deposited in Bank B contained a restrictive endorsement “for mobile deposit at Depositary Bank A only” and the customer’s account number at Depositary Bank A. Depositary Bank B may not make an indemnity claim against Depositary Bank A because Depositary Bank B accepted the original check bearing a restrictive endorsement inconsistent with the means of deposit.

What all this means on a practical level is that you may want to limit access to remote deposit capture to your more seasoned members. Remote Deposit Capture is the future but it’s also ripe for abuse. The new regulations make clear that the credit union offering the service is ultimately vouching for its member’s trustworthiness.

 

Entry filed under: Compliance, General, Regulatory. Tags: .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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