Posts tagged ‘Reg CC’

Five Things You Need To Know As You Start Your Credit Union Day

Usually gleaming anything useful from the congressional testimony of Fed Chairman is about as easy as interpreting hieroglyphics without the use of the Rosetta Stone but yesterday was a glaring exception. Most importantly for credit unions all the major news outlets that I read this morning agreed that Jerome Powell was all but announcing that the Fed will be cutting short-term interest rates soon.

In his testimony he deemphasized the latest encouraging jobs report and made it abundantly clear that the uncertain times we live in are impacting the economy. Specifically, he noted that “crosscurrents have reemerged. These concerns may have contributed to the drop in business confidence in some recent surveys and may have started to show through to incoming data. In our June meeting statement, we indicated that, in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.”

Translation: inflation is in check and while the economy is growing it could use the boost offered by a rate cut which will be particularly beneficial to workers on the lower end of the economic pay scale.

Powell to Trump: Hell no I won’t go

Another incredibly blunt moment of the Chairman’s testimony came in response to a question from House Financial Services Chairman, Maxine Watters who asked him how he would respond if the President was to ask him to resign. Powell has of course been a prime target of the President’s tweet tantrums lately. “My answer would be no,” Powell responded, making it quite clear that any effort to remove him would result in a messy, messy legal dispute.

Powell to Facebook: Not so fast

Powell was also in a targeted mood when it came to throwing cold water on the plans of Facebook and other companies to introduce a crypto currency (See Monday’s blog). According to the American Banker, Powell responded to lawmaker questions on the issue by bluntly opining that the project can’t go forward until regulators are satisfied that the companies have a better feel for the full range of issues ranging from potential money laundering to the creation of a systemically important currency which conceivably could have the potential of dealing a body blow to the entire world’s economy.

Reg CC Update

The NCUA recently provided this notice reminding credit unions, among other things, that the monetary thresholds promulgated under Reg CC have been updated. You might want to make sure that your cooperating system got the message.

A Good Read

Finally, although it’s not directly related to credit union land, here is a great article by Greg Ip of the WSJ delving into one of my favorite issues: is there a skills gap in the American economy?

July 11, 2019 at 9:27 am Leave a comment

Are You Really Ready For Remote Deposit Capture?

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.


June 8, 2017 at 9:28 am 1 comment

In defense of the Bitcoin

 I am exaggerating slightly but I have to do something extra to  get your attention  after getting my post out late this morning. 

Yesterday the Federal Reserve released a report detailing payment trends. When one compares how quickly and dramatically the payment system is evolving with how slowly stake holders and regulators are moving to react, it’s obvious that this is yet another area where technology has outpaced the capacity of regulators, legislators, banks and credit unions to respond to changes in the marketplace.

Why should you care? For the same reason, you should care about the potholes that you have to avoid on the way to work, or the dilapidated train tracks on which you may commute. At some point, these cross the line from being inconveniences to impacting your ability to provide the services members expect. Think of it this way: our payment system is basically a cutting edge version of the Pony Express at a time when virtual currencies, for all their defects, demonstrate that there are cost-effective ways to facilitating instantaneous clearing of payments without the intervention of third parties.

Paper checks are headed for an exhibit in the Smithsonian within a couple of decades at the latest. My five-year old didn’t know what a pay phone was when she saw one A couple of months ago and am positive that her daughter will be equally amused that people used to pay for things by promising to pay for them in writing with paper checks and popping these contracts in the mail. The report confirms that more personalized payment person-to-person payments are beginning to make a mark

One of the trends recognized “in The 2013 Federal Reserve Payments Study is the replacement of check writing as a form of noncash payments to customers’ use of alternative bill payment methods. One alternative to check writing was direct payment to the biller through ACH transactions or via general-purpose cards. Another popular alternative, online or mobile bill payments, was estimated to have 2.5 billion transactions in 2012. Online or mobile person-to-person (P2P) transfers, yet another popular alternative offered by depository institutions, totaled 138.0 million transactions in 2012.”

This is a great example of where our payment system is so out-of-date. Remember that a person paying with a mobile wallet or making a person-to-person transfer has generally not created a “check” sine the item being created was not converted from a paper check. Since 2011 the Fed has considered updating its regulations to provide that a bank receiving and electronically created item has certain warranty claims against a prior bank such as stipulating that a bank that sends an electronically created image “as if” it were a check makes the same promises or warranties that it would if the image was a check. A formal regulation was proposed late last year. To date this hasn’t been finalized. and although it a good first step is only a first step in hashing out the obligations of financial institutions that are going to play an increasingly passive role in the payments process.

Another example is Remote Deposit which is being advertised heavily these days. Do you have remote deposit or are thinking about offering it? Another issue that this regulation is seeking to address for the first time is the liability of parties where a member cashes the paper version of a check that he has also electronically deposited. There are a multitude of issues involved with this technology, and if you want an excellent overview of just how complex and far-reaching they can be get a hold of the December 13 issue of Clocks’ Bank Deposits And Payments Monthly which includes an excellent analysis by the Senior counsel for Wells Fargo. We need an ongoing and quick-moving process where stakeholders look at the most basic premises of our payments system and start from scratch. The Fed is moving in this direction but not fast enough.

One more thought when it comes to virtual currencies. It’s important that regulators not throughout the baby with the bath water. What the bitcoin demonstrates is that, if we were all creating a payment system today, it would put nothing like the one we are trying to retrofit for the 21st century. These changes are coming whether banks and credit unions want them to or not, because consumers are going to demand them. I’d rather have a better regulated modern payment system as opposed to seeing credit unions at a competitive disadvantage because they are constrained by the requirements of an antiquated one.

The links to the Reg CC proposal and the Fed Report are available right here.



September 5, 2014 at 9:58 am 1 comment

Crime doesn’t pay, but because some people think it does…

Despite what Woody Allen says, crime really doesn’t pay, it is just that there’s always going to be some people who don’t get that.

Although Manhattan District Attorney Cyrus Vance is best known for bungling rape investigations of prominent French politicians, his office deserves credit for prioritizing financially related cyber crimes for investigation and prosecution.  Interestingly, I can think of no place more removed from Manhattan, both culturally and geographically, than Watertown, New York.  However, recent arrests in both localities provide important reminders to credit unions as they seek to prevent both good old-fashioned theft and computer-aided crime.

In Manhattan, the District Attorney’s cyber crimes and identity theft bureau announced that 94 persons were indicted this past week for their role in capitalizing on a defect in TD Bank’s account opening procedures.  From May 2009 to August 2011, persons were recruited to open up new checking and savings accounts using checks drawn on either closed accounts or from accounts at other banks that had insufficient funds.  The bank was aware that Regulation CC’s check availability rules don’t apply to newly opened accounts; unfortunately for the bank, someone knew that new account owners could transfer these funds from newly opened savings accounts over the phone into their newly opened checking accounts.  The account openers were then driven to casinos, Western Union branch locations, or banks with particularly high ATM withdrawal limits where the money from the bogus checks would be withdrawn.  The scheme is estimated to have cleared $494,000.

Also this past week, police in Watertown, New York arrested the manager of United Neighbors Federal Credit Union for allegedly stealing more than $34,000 from the credit union between January 1 and November 3 of this year.  According to the paper, the three-year employee of the credit union told police that she stole $18,000 from the ATM and the rest from her cash drawer, although the newspaper account provided no specifics as to how exactly she carried out the heist.  She admitted to the crime  immediately upon observing that an audit was being conducted by the credit union’s audit committee.

To me, these disparate examples provide several important reminders for credit unions.

First, although you should all be putting your finishing touches on implementing the FFIEC’s layered security guidance, which examiners are going to begin reviewing in 2012, this guidance is in addition to rather than a replacement of the obligation of credit unions pursuant to section 12 CFR 748 to deter robbery, larceny, and embezzlement.  For credit unions like the one in Watertown, New York this means recognizing the importance of audits.  It’s not enough to have a policy in place, polices must be implemented.

For larger credit unions, this means insuring that you periodically review not only new account opening procedures, but the computer systems used to put them in place. One of the biggest mistakes a financial institution can make is to fail to monitor the systems put in place by its vendors or, if you’re lucky enough, your information technology employees.  Is your credit union vulnerable to the same type of crime which bamboozled TD Bank for more than a year?  Do you know who at your credit union would know the answer? 

Irrespective of size, a credit union’s security procedures should not be static, but rather evolve to address potential new vulnerabilities.  Make sure that someone in your credit union is aware of the latest schemes and that your credit union can guard against them.

December 12, 2011 at 7:18 am Leave a comment

Check Please. . .

Good morning to everyone, especially you Buffalo Bills fans.  Thanks for the entertaining game that this Giants fan had the good fortune to watch live. 

Suppose you get a check returned to your credit union not because there were insufficient funds in the account from which it was drawn but because its routing information was either damaged or illegible.   Does your credit union have an obligation to inform the member that the check has been returned if you  correct the error and send it back into collection?  Would your answer change if the member was told that the check had cleared?

These are the issues the Court of Appeals addressed in a decision published Friday, October 14, 2011.  Given the importance of the UCC and the fact that the issues raised in the case were important enough to be addressed by New York’s highest court, this decision is one that someone at your credit union should be assigned to read. 

The case involved a law firm that thought it was retaining a client in Asia.  The law firm received a check for $197,000 from what it believed to be a client of the corporation.  The firm waited six days and called HSBC.  An employee informed the firm that the check had “cleared.”  Secure in this knowledge, the bank wired all but $10,000 of the amount to a Citibank account in Hong Kong. Unfortunately, the check was a counterfeit and HSBC debited $197,000 from the firm’s account.

In its attempt to get its money back, the law firm offered proof that the first time the check was sent for collection, Citibank returned the check to HSBC with a notation that it was “sent wrong.”  The bank resubmitted the check with what it believed to be the proper routing number only to have it returned a second time, this time for insufficient funds.  Was any one to blame here?

The Court of Appeals said no.  First, since the law firm had no account relationship with Citibank, Citibank could not be sued for negligence by the law firm.  The Court of Appeals concluded that the only obligation of the bank was to return the check to HSBC by the midnight deadline or accept the check.  In other words, a bank acting as a third-party in the check collection process cannot be sued for negligence by the payee. 

The law firm attacked HSBC on two grounds.  First it argued that it was negligent in informing the law firm that the check had cleared.  Secondly, there is nothing in the UCC that allows for a check to be returned for administrative error.  The check should have been treated as if it was dishonored and the law firm notified of the return.  

Again the Court was un-persuaded.  First, simply saying a check is cleared is a vague term open to many interpretations.  In addition, HSBC’s account agreement clearly stated that all funds are provisionally credited until final settlement.  The Court also noted that common industry practice allows for “administrative returns” of checks and that it is common for banks to resubmit checks for collection with the proper routing information.

There are several practical lessons to be drawn from this decision.  Most obviously, be careful what you say to lawyers, we will sue you at the drop of a hat.  Also, this is the second case I have seen in the last year in which a bank was sued after telling a customer that a check had cleared only to see the check subsequently bounce.  As a result, review your account agreement to make sure it speaks to provisional credit.  And, as strange as this may sound, you may want your employees to inform members that to the best of their knowledge, the money is provisionally available unless they know for a fact that the money has been successfully drawn from the paying bank’s account.  Finally, changes are pending to require all financial institutions to accept checks for collection and return electronically.  Although not directly related to the UCC, if you are a credit union that has yet to plan upgrades to your technology to comply with these potential changes, you are needlessly exposing yourself to totally avoidable liability. 

NCUA Announces Flood Insurance Guidance

Late Friday, a joint guidance was issued updating questions and answer guidance related to flood insurance guidelines, as well as proposing additional amendments.  Given the unfortunate reminder we all have had of the importance of these regulations, I would appreciate any feedback you may have as you review this proposal.

October 17, 2011 at 7:09 am Leave a comment

Authored By:

Henry Meier, Esq., Senior Vice President, 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. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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