Transcript Test Master Look

NCP 2015 Exam Cycle
Core Training Series
Session 9
National Check Payments Certification
Check Products
Copyright© 2014 by the Electronic Check Clearing House Organization
NOTICES
This training course may provide an introduction to or summary of various aspects of check
payments and the legal and rules framework for check image exchange. Responsibility for
compliance with image exchange rules, and/or the legal, operational and regulatory
requirements applicable to check image exchange, remains at all times with the financial
institution participating in check image exchange and/or the individual or company using a
check image exchange service.
This presentation and the information contained herein is not intended as legal or compliance
advice or recommendation to any person or company. 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.
Financial institutions should consult with their legal counsel regarding legal and operational
requirements applicable to any check image exchange program they may offer or in which they
participate.
These program training materials may not be reproduced or published, in whole or in part,
without the express permission of ECCHO.
Copyright© 2014 by the Electronic Check Clearing House Organization
(Certain contributed content subject to third party copyrights)
National Check Payments Certification
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Session Overview
•
•
•
•
Types of Checks
Check Products
Remote Deposit Capture
Check Conversion
– Common ACH SEC Codes
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Types of Checks
• Check: Defined in Regulation CC as a negotiable
demand draft
– Defined as item in UCC
– Eligible for image exchange and creation as
substitute checks
• Certified Check: Ordinary check presented by
drawer to Paying Bank for “certification”
• Government Check: Instrument payable on
demand and drawn by U.S. government on itself
– Generally regarded as checks, even though they
are not drawn on bank
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Types of Checks
• Cashier’s Check – Bank is both drawer and drawee
–
–
–
–
–
Drawn on a bank
Signed by officer / employee of bank on behalf of the bank as drawer;
Direct obligation of the bank
Provided for remittance purposes
Commonly used when payment must be credited immediately upon
receipt
Ex: Business, real estate transfers, tax payments, etc.
• Teller’s Check – Drawn by a bank on another bank
– Includes checks payable at or through a bank
Would also include checks drawn on a nonbank, as long as check is
payable through or at a bank
– Common uses may include:
Check provided to customer for account disbursement or interest
payments
Check acquired by noncustomer for remittance purposes such as certain
loan disbursement checks
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Types of Checks
• Cashier’s check and Teller’s check
– Generally cannot place stop payment
– Guaranteed obligations of the bank
• If check is lost, stolen or destroyed (UCC 3-312)
– Remitter or payee of cashier’s check or teller’s check
may file Declaration of Loss
Written statement they lost possession of check
• Bank may refuse payment under certain other
circumstances
– Examples:
Alteration or forged endorsement
Claim against the payee/presenter
– Be sure of facts and circumstances
Penalties for wrongfully refusing payment (UCC 3-411)
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Types of Checks
• Money Order: Draft purchased from financial
institution, post office or sales agent to pay a debt
or transfer funds
• Traveler’s Check: Payable on demand and drawn on
or payable at or through a bank
– Requires, as a condition of payment, a countersignature
by person whose specimen signature appears on
instrument
• Payable-Through Draft: Drawn on issuer, not bank
– Not an order on the payable through bank to pay
instrument
– Designates bank to present draft to drawee for payment
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Types of Checks
• Warrant: Issued by state or local government
agencies
– Treated as checks if payable on demand
– Registered Warrants: Promise to pay (not a check)
Example: State of California issued registered warrants
several years ago to pay state’s obligations
• Remotely Created Check (RCC)
– Holder of account authorizes payee to draw check
on account but does not sign check
• Substitute Check
– Negotiable instrument created by Check 21 Act
Properly prepared substitute check is legal equivalent
of original item for all purposes
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Non-Cash Item
• Item that would otherwise be a check, except
that
– A passbook, certificate or other document is
attached
– It is accompanied by special instructions
Such as a 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
– It has not been preprinted or post-encoded in
magnetic ink with the routing number of the paying
bank
– It is a Foreign item
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Remotely Created Checks
• Checks created “remotely” by a payee, under the
authority of the account holder
• Defined in Reg CC
– Warranty by BOFD established in Reg CC
– Claim process through rules and OC 3
• Banks and customers manage risk
– BOFD know your customer
• Perception all RCCs are fraudulent
– Publicized cases in recent years with significant
enforcement and judgment amounts
– Examiners have issued updates to regulatory guidance
for RCCs over the years
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Remotely Created Checks
• Legitimate reasons to create RCCs
– Created for consumer and corporate accounts
• RCC commercial uses may include:
– Pre-authorized drafts
Pay a creditor
Bill payment services
– ACH administrative returns
– Purchase item via telephone or internet
– Collect return check fees
• Benefits of Remotely Created Checks (RCCs)
– Economical
– Fast clearing
– Convenient
– Same day posting
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Apply Your Knowledge
Note: Banks are all ECCHO Members
Statement
Deposit
Drawer
Customer
IMAGE
IMAGE
Unauthorized
Remotely
Created Check
Remotely
Created
Check (RCC)
Payee /
Company
Creates RCC with
permission of
Payee to Pay Late
Utility Bill to
Avoid Late Fee
Bank A – Has
Authorization
(BOFD)
Intermediary /
Collecting Bank
Paying Bank
Rule 8 Claim
• Can the Drawer Customer make this “Rule 8” claim for the Unauthorized RCC?
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Apply Your Knowledge
Note: Banks are all ECCHO Members
Statement
Deposit
Remotely
Created
Check (RCC)
Merchant
Creates and
Deposits
the RCC
Adjustment
to
Bank A
Bank A
(BOFD)
Drawer
Customer
IMAGE
IMAGE
Unauthorized
Remotely
Created Check
Unauthorized
RCC
Adjustment
Intermediary /
Collecting Bank
Paying Bank
Rule 8 Claim
• Unauthorized RCC: What two ways may be used to handle under ECCHO Rules?
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Check Products
Check Products
•
•
•
•
•
Lockbox Services
Account Reconciliation Products (ARP)
Controlled Disbursements
Image Cash Letter (ICL)
Remote Deposit Capture
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Lockbox
• Lockbox Services
– Bank or third party receives mail at a specified
post office box
– Processes enclosed remittances
– Deposits to Payee’s account
– Benefits:
May allow for faster collection
Information vehicle
Payments concentration
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Lockbox
• Types of lockbox services
– Retail Lockbox – Characterized by large number
of relatively small dollar remittances usually
from consumers
– Wholesale Lockbox – Characterized by small to
moderate number of large dollar remittances
usually from businesses
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Account Reconciliation (ARP)
• Account Reconciliation Products (ARP)
– Product dates back to when banks offered to
reconcile customer bank statement
Initially banks offered fully reconciled statement of
checks paid and deposits made
Then banks sorted paid checks in check number order
Next customer notify banks of checks written and banks
supply statement listing activity, including checks
outstanding
– Goal of product
Increase amount of information available
Decrease amount of work in company’s accounting
dept.
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Account Reconciliation (ARP)
• ARP Services Provide Wide Range of Reporting
– Access to reports through automated means
– Offered for multiple accounts / Schedule defined by
customer
Daily, weekly, monthly
• Range of Reconciliation Products
– Full Reconciliation
Customer provides bank data on checks issued
Bank matches data against checks cleared
Customer receives reconciliation reports including checks paid,
outstanding items and exceptions
– Partial Reconciliation
Customer receives report of items paid sorted by customer’s
instructions
– Deposit Reconciliation
Allows customer to maintain one account
Have deposits from multiple business locations
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Account Reconciliation (ARP)
• Positive Pay
– Automatically matches each check presented against list of
checks issued
– Payee Positive Pay matches payee name from issue file to
payee name on check
• Reverse Positive Pay
– Bank sends that file to the company, where the company
compares the information to its internal records
• Positive pay type services excellent fraud deterrent
products
• CD-ROM Products
– Banks may provide customers with check images via CD
Used by customers with large check volumes
– Banks index images for retrieval process
– Service eliminates need to store paper checks
Reduces difficulty in retrieving checks for research
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Controlled Disbursement
• Previously known as Remote Disbursement
– Numerous changes to payment system and
regulations have impacted Controlled
Disbursement
• Today – with increased speed of clearing
checks, customers use Controlled
Disbursement services to “control”
information about amount to fund on each
day
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Controlled Disbursement
• Product provides customer with information
early each day of total amount of checks that
will clear
– Customers fund account for amount of checks
posted that day
– Early notification of day’s funding requirement
eliminates idle balances
– Customers can invest surplus funds or obtain
additional funds, if needed
– Money markets active and investment rates
attractive in morning
Short term investment rates generally move
downward late in morning
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Controlled Disbursement
• Benefits of Controlled Disbursement include
– Reduction of idle balances
– Timely notification of daily funds need
– Increased interest income from short term
borrowing
– Reduced borrowing costs
• Key benefit – Potential fraud reduction
– Early information
– Know what items are coming in to be posted
today against your account
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Image Cash Letter
Forward Collection
IMAGE
CASH LETTER
DEPOSIT
CHECK
CUSTOMER
Image Cash Letter: Digital images of paper cash
letter; includes both the MICR data record and the
transmitted check images
SENDING BANK
TRUNCATING BANK
(BOFD)
RECEIVING BANK
IMAGE
CASH LETTER
PAYING BANK
STORE CHECKS
Truncation: Stop processing of
physical paper item(s) and forward
electronic image(s) and MICR data
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Image Cash Letter (ICL)
• Image Cash Letter (ICL)
– File containing digital images of paper cash
letter
– Includes MICR data records, indorsement
records and check images
– Electronic cash letter structure with same
general information as paper cash letter
– Formatted to industry standard X9.100-187
Contains and transports image and MICR data
captured from paper check
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Image Cash Letter (ICL)
• Used to transmit checks between:
– Customers and banks
– Banks and Federal Reserve
• May be offered as a product by banks to corporate /
correspondent bank customers for delivery of check
deposits to banks
– ICL: Typically used for significant volume of checks
Sent to/from banks and processors
– RDC: Typically used for smaller volumes of checks
Banks may used same terminology
– Terminology – ICL originally used to differentiate between
paper and image cash letters
Banks have expanded usage
Some banks used to define a specific product/service offering
Some use term generically
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Image Cash Letter (ICL)
• Ideal for companies with centralized in-house
receipt processing
– Examples:
In-house lockbox at utility company
Correspondent bank with in-house check processing
operations
– Customer has ability to capture/transmit MICR
data and check images
Banks offering product may:
o Require customer to create formatted file or
o Provide customer with software to reformat
o Accept the data for the bank to reformat
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Image Cash Letter (ICL)
• Benefits to customer
– Reduced transportation costs
– Reduce or eliminate trips to deposit checks
– More efficient back-office processing
– Later deposit cutoff time allowing more checks deposited on
day of receipt
– Faster return processing and notification due to faster initial
deposits and clearing
– Secure, private and safe electronic connections with banks
• Cost savings to the customer
– Consolidation of operations
– Consolidation of reconciliation
– Larger balances in centralized account
– Elimination of multiple accounts and need to concentrate
funds
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Remote Deposit Capture
• Service that allows user to scan and
transmit scanned images to service provider
or bank to electronically deposit for clearing
and posting
– Purpose: To speed up / electronify the deposit
process by truncating paper early in collection
process (at customer site)
• Remote Deposit Capture (RDC) services
offered to range of customers:
– Both corporate and consumer
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Remote Deposit Capture
• General Benefits
– Reduced transportation time and costs
– Increased processing efficiencies
– Potential for consolidating relationships
• Benefits for Corporate Customers And Merchants
– Accelerated clearings and better deposit availability
– Convenience and enhanced cash flow
– Reduced return item risk
• Benefits For Financial Institutions
– Opportunities to expand customer footprint
– Ability to offer new products
– Customers with multiple locations can consolidate
deposits into one account
– Customer can make deposits 24 hours a day
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Types of RDC
• Branch Capture
– Image capture of paper checks at branch location
– Capture at image-enabled ATMs
• Customer Capture
– Corporate/Merchant Capture
Image capture of paper checks at corporate customer’s location
– Consumer Capture
Image capture of paper checks at customer’s location
– Mobile Capture
Image capture of paper checks by customer taking photo of
front/back of check
Rapid growth in MRDC today
• Corporate, Consumer or Mobile
– Key elements regardless the channel / solution
Customer selection (KYC)
Strong customer agreements
Training – Staff and customers
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Remote Deposit Capture
• Financial Institution decisions may include:
– Image vs. ACH
– Vendor choice
– Support for required training
• Customer Requirements can include:
– PC with Internet connection
– Check MICR scanner
– Flatbed scanner
– Mobile (smartphone)
– Service provider/depository bank
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Remote Deposit Capture
• RDC Controls – Understand FFIEC Guidance
– Establish procedures to properly separate,
handle and secure physical checks to avoid:
Accidentally reimaging the checks
Sending imaged check out in a paper cash letter
Having checks stolen and mishandled
– Retention of original truncated checks
Decide what to keep and retention period(s) based
on risk tolerance
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FFIEC Guidance
• FFIEC – Federal Financial Institution Examination
Council Guidelines issued January 2009
– Examination manual issued February 2010
• Addresses necessary elements of RDC risk
management process in electronic environment
– Focuses on:
RDC deployed at customer location
Mobile banking
Automated clearing house (ACH) check conversions
– Review and understand FFIEC Guidance regarding
agreements
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Check Conversion
ACH “Check Conversion”
• Electronic debit to a consumer’s checking
account that is initiated via check
– Converted to an ACH transaction and processed
using the ACH Network
– Governed by Reg E and NACHA Rules and other law
– May be governed by check law (RCK)
• Examples covered in this section include:
– ARC: Accounts Receivable Entries
– BOC: Back Office Conversion
– POP: Point-of-Purchase
– RCK: Re-Presented Check Entries
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Eligible for “Conversion”
• Contain pre-printed serial number
• Must not have been previously negotiated or voided
• Have RT, account number and check serial number
encoded in magnetic ink
• Must not contain Auxiliary On-Us field
• Amount of $25,000 or less
– Less than $2,500 for RCK
• Be completed and signed by the consumer
– Required for ARC and BOC
POP: Check not required to be completed; Becomes “source
document” / Returned to customer
• RCK – if previously presented:
– No more than twice in paper form (if initial RCK); or
– No more than once in paper; once as RCK if reinitiated as RCK
– Two representments allowed; three total presentments
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Ineligible for “Conversion”
• Contain Aux on-us field in MICR line
• Check payable to a person other than Originator
•
•
•
•
•
•
•
– Third party check
Draft that does not contain the signature of receiver
(demand draft / remotely created check)
Obligations of financial institution
– Travelers check, cashiers check, official check, money order
Check provided by a lender to access:
– Credit card account
– Home equity line or other form of credit
Checks drawn on an investment company
Government checks (state or local)
Check drawn on US Treasury, Federal Reserve Bank or
FHLB
Checks in foreign currency
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Notice Language
• “When you provide a check as payment, you
authorize us either to use the information from
your check to make a one-time electronic fund
transfer from your account or to process the
payment as a check transaction. For inquiries,
please call <retailer phone number>.”
– Note: Need <retailer phone number> for BOC only
• Notice language comes from Reg E
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Accounts Receivable Entries (ARC)
• Enables Originator to convert checks received via
U.S. mail or dropbox
– Single-entry ACH debit for payment of goods or services
• Originator retains the check
– No destruction timeframe
• Authorization: Prior to receiving check, Biller must
provide notice to customer that receipt of check will
be authorization for ACH debit
– Check will be used as source document
– MICR line information captured using MICR reader
Dollar amount can be key-entered
• Retention: Check is retained by biller
– Secure storage until destruction
– 2 year retention of copy
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Accounts Receivable Entries (ARC)
Customer /Receiver
notified future utility bill payments
may be coverted to ACH.
Customer mails the
next monthly bill payment to
Utility Company/Drop Box
Checks Scanned /
MICR Data Captured
Utility Company
(Mail or Drop Box)
ACH Debit
ODFI
Originating Depositary
Financial Institution
National Check Payments Certification
ACH Debit
ACH Network
Operators
(Fed or EPN)
RDFI
Customer /
Receiver
Receiving Depositary
Financial Institution
41
Back Office Conversion (BOC)
• Allows Originators to convert checks to ACH debits during
back office processing
• Checks accepted at point-of-sale, or manned bill payment
locations
– Creates single-entry ACH debit
• Authorization obtained via notice and receipt of check
– Notice prior to the receipt of each check
– Posted in prominent and conspicuous location AND
– Copy of notice provided to Receiver at time of transaction
• Retention: Check is retained by biller
– Retains source document for back office processing
– Secure storage until destruction
2 year retention of copy
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Back Office Conversion
Check presented
in person at
merchant location
Merchant/Originator
NOTICE must
be posted /
visible
Receipt goes
back to
Customer
Consumer/
Customer
MICR Information
Captured in Merchant’s
Back Office
(Check scanner)
Sent to ODFI
ACH Debit
ODFI
Originating Depositary
Financial Institution
National Check Payments Certification
ACH Debit
ACH Network
Operators
(Fed or EPN)
RDFI
Receiving Depositary
Financial Institution
43
Point-of-Purchase Entries (POP)
• Convert check received for goods or services at
point of purchase or manned bill pay location
• Single-entry ACH debit transaction
• Authorization: Originator obtains customer’s
written authorization
– Customer may not revoke authorization
– Copy of authorization, voided check, and receipt
must be given to customer
Should indicate check will not be processed
• Retention: Originator keeps copy of
authorization
– 2 years following settlement date
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Point-of-Purchase Entries (POP)
Merchant/Originator
Check presented
in person at
merchant location
Authorization
Signed
NOTICE must
be posted /
visible
“Check” and
Receipt handed
back to
Customer
MICR Information
Captured by Merchant’s
Point of Sale Device
(e.g.; Cash Register)
and
Sent to ODFI
ACH Debit
ODFI
Originating Depositary
Financial Institution
National Check Payments Certification
ACH Debit
ACH Network
Operators
Electronic
(FedNetwork
or EPN)
RDFI
Receiving Depositary
Financial Institution
45
Re-Presented Check Entries (RCK)
• Single-entry ACH debit entry replacing paper
check after paper check returned for insufficient
(NSF) or uncollected (UCF) funds
– Consumer checks only, under $2,500
• Covered by NACHA rules and check law
– UCC and Reg CC
• Number of Presentments
– RCK entry can be presented one or two times
If only one previous check presentment
o RCK entry can be transmitted twice
If two previous check presentments
o RCK entry can be sent only once
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Re-Presented Check Entries (RCK)
• Authorization
– Originator must provide notice of RCK policy to
check writer before receiving check
– Notice must clearly and conspicuously state
terms of RCK policy
• Notice plus receipt of consumer’s
check constitutes authorization
– Copy of check must be retained for 7 years
under check law
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Re-Presented Check Entries (RCK)
Merchant/Originator
Bank of First Deposit / ODFI
(1)
Paying Bank/RDFI
Check Presented
to Paying Bank
(2)
Not paid – check is
Returned
(3)
Customer
purchases goods
(4)
RCK
to
RDFI
(Paying Bank)
NSF check
converted to
RCK
Pays with a check
ACH Network
Operators
(Fed or EPN)
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ACH Returns
• ACH entry that RDFI is unable to post may be
returned
– Reason for return, return codes and return deadlines
listed in NACHA rules for all SEC codes
• For ARC, BOC, POP, RCK entries listed this section:
– May be returned for any valid return reason
– Timing: Generally, return must be available to ODFI no
later than opening of business on 2nd banking day
following settlement date
– Extended Return Timeframe
60-day extended return timeframe
Written Statement of Unauthorized Debit (WSUD) required
• Common return reasons for e-check conversion SEC
codes listed on next page
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Return Time Frames
Return
Code
Reason
for
Return
Description
For TEL, WEB entries: Customer who previously
authorized an entry claims authorization has been
R07
Authorization Revoked
revoked from the Originator by the Receiver
For ARC, BOC, POP, TEL, WEB entries: Transaction not
Customer Advises Not Authorized,
authorized, wrong amount, debit date before
Improper, ineligible, or part of an
authorization, incomplete transaction, or improper
R10
incomplete transaction
source document
Source document to which the ARC, BOC, or POP entry
R37
Source Document Presented for Payment relates has been presented for payment.
ARC and BOC only. A stop payment order has been
placed on the source document related to the ARC or
R38
Stop Payment on Source Document
BOC entry.
RDFI determines the source document used for the
Improper Source Document /
ARC, BOC, or POP entry is not an eligible check or the
R39
Source Document Presented for Payment source document was also presented for payment.
RCK Entries:
R50
R51
R52
R53
State Law Affecting RCK Acceptance
RCK Item is Ineligible, Notice Not
Provided
Signature Not Genuine
Iten Altered or Amount Not Accurately
Obtained
Stop Payment on RCK Item
RCK Item and ACH Entry Presented for
Payment
Deadline
WSUD
Req?
60 Days
YES
60 Days
YES
60 Days
YES
60 Days
NO
24 Hrs
NO
Transmitted to RDFI's ACH
Operator by midnight of the 2nd
RCK only - RDFI is located in a state that has not adopted banking day following the
UCC 4 (1990) that requires cancelled checks be returned banking day of receipt of
to the receiver.
presentment notice
RCK only - Item related to the RCK entry was not
eligible, or Originator did not provide notice, or
signature on the item was not genuine, or the item has
been altered, or the amount was not accurately
obtained from the item.
60 Days
RCK only - Stop payment on item related to RCK entry.
60 Days
RCK only - both the item related to the RCK entry and
the RCK entry have been presented for payment.
60 Days
NO
YES
NO
YES
50
Questions
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Recommended Resources
• FFIEC References:
– FFIEC – Supplement to Authentication in an Internet Banking Environment –
Oct-2005: http://www.ffiec.gov/pdf/Auth-ITS-Final%206-2211%20%28FFIEC%20Formated%29.pdf
– FFIEC - Supervisory Guidance for Remote Deposit Capture 1/14/2009:
http://www.ffiec.gov/pdf/pr011409_rdc_guidance.pdf
– FFIEC - Retail Payment Systems Feb-2010:
http://ithandbook.ffiec.gov/it-booklets/retail-payment-systems.aspx
• Regulation CC (12 CFR – Part 229): http://www.ecfr.gov/cgi-bin/text-
idx?SID=0ed75d38896a339d9b5189ceb4ebe8b9&node=12:3.0.1.1.1
0&rgn=div5
• NCP P.R.E.P. Guide EXHIBIT 4: ACH Check Conversion and Selected
SEC Codes Overview
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Ellen Heffner, NCP
Director and Education Manager
[email protected]
214-273-3211
Check Products
Thank You!
Electronic Check Clearing House Organization
3710 Rawlins Street; Suite 1075
Dallas, Texas 75219
NOTICE
This NCPC Program document contains copyrighted materials of its publisher.
These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO.