National Check Payments Certification
Exceptions – Returns and Adjustments
Copyright© 2014 by the Electronic Check Clearing House Organization
NCP 2015 Exam CycleCore Training Series
Session 8
2National Check Payments Certification
NOTICESThis 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)
3National Check Payments Certification
Session Overview
• Exceptions Overview–Returns–Adjustments
• Federal Reserve Bank – Adjustments• ECCHO Rules – Adjustments
Exceptions Overview
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General Definition
• Exceptions: Any transaction in the form of a paper, image or electronic item that requires further investigation before final disposition of item can be determined–Returns and adjustments are exceptions
• Return – Item that is dishonored by Paying Bank–Must have specific return reason
• Adjustment – Correction for error(s) generally caused during item processing–May involve research to resolve multiple errors
Ex: Mis-encoding, mis-routing, incorrect posting, etc.
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Governing Rules & Regulations
• Returns – Governed by statutory and regulatory requirements–UCC midnight deadline (UCC 4-301)–Reg CC expeditious return requirement (§ 229.30)
• Adjustments – Handled “by agreement” of the parties–Fed OC 3 rules–Clearing house rules–Third party providers for operational procedures
and settlement
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Return or Adjust?
• An error has occurred – as the Paying Bank your return clocks are ticking– UCC requires you make the determination to pay or
dishonor the item by midnight of the day following presentment– Reg CC requires if the item is to be returned, the return
(or notice or return) be handled expeditiouslyReturn must reach depositary bank by 4:00 p.m. (local time of
depositary bank) two days after presentment• Do you return the item? • Do you adjust the item?–What are your options?
8
Return vs. AdjustmentAdjustments Considerations
• Made to appropriate party– Minimizes negative impact to customers– Handled within banking system– Adjustment areas familiar with process
• Can be less efficient than return– Settlement timing; Additional documentation
• May lose right to return item (missed deadlines for timely return)– Significant issue if item is counterfeit or forged and not duplicate
Paying BankBOFD
IMAGE
Deposit Chk
Image Adjustment
Image Return
or
Sub Chk
Drawer Customer
Duplicates
Sub Chk Return
IMAGE
Depositing Customer
Caused Duplicate
9
Return vs. Adjustment
Paying BankBOFD
IMAGE
Deposit Chk
Image Adjustment
Image Return
and
or
Sub Chk
Drawer Customer
Duplicates
IMAGE
Depositing Customer
Caused Duplicate
Sub Chk Return
Returns Considerations
• Faster – Timely Settlement – Do not lose right of return– In remote capture environment (RDC), speed is a consideration if
unsure of cause of duplicate• May have negative customer impacts
– Depositing customer and/or drawer customer
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Exceptions – Returns• Return items may be directed back to:– BOFD, or – Prior collecting or presenting bank
• Returns processes dependent on channel used and agreements in place–Must still follow regulatory requirements
For expeditious return, check must be received at depositary bank by 4:00 pm 2nd business day following banking day of presentment
• Reg CC requires Paying Bank:– Identify return and reason for return
Clearly indicate reason for returnIf substitute check, place information within image on front of
substitute check
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Types of Image Returns
• Customer and Administrative Returns–Customer Returns
May be called monetary returnso Dishonored item under check lawo Usually attempt charge to customer account
–Administrative Returns/Administrative reasonsMay be called non-monetary returns
o Return for reason other than dishonored itemo Usually handled internally rather than charged to customero Can also be handled through adjustment process
If handled as returno Must adhere to legal requirements for return item
–All Returns Carry Monetary Value
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Reasons for Return
• Common Return Reason Codes–Customer Return Reasons
NSF – Not Sufficient Funds = ‘A’Stop Payment = ‘C’Closed Account = ‘D’Endorsement Missing = ‘I’Not Authorized = ‘Q’Warranty Breach = ‘3’
–Administrative ReasonsImage Missing = ‘I’Ineligible = ‘Q’Unusable Image = ‘U’Duplicate Presentment = ‘Y’
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Return Reason Codes / Duplicates
• Need to use return reasons in electronic indorsement records–Helps identify represented items–Helps prevent false “positives” in duplicate
checking–Following slides offer brief review of
forward/return “flipping” of indorsement recordsCovered in prior session
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25
26*
Paying Bank
Bank of First Deposit
(BOFD)
Legend:• BOFD – Lt. Green*• Paying Bank – Red
Forward Presentment
• Check Detail Record (Type 25)• Check Detail Addendum A Record (Type 26)
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31/33
26 * 32
X9.100-187 FlowsReturn
“26” becomes “32” record
Return Record/Return Addendum B
35
Return Reason in Type 31 & 35 records
New “35” record added
by Paying Bank
Bank of First Deposit
(BOFD)
Legend:• BOFD – Lt. Green*• Paying Bank – Red
Paying Bank
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• Return Routing Hierarchy
ECCHO Rules
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Represented Items
• Depositary Bank may represent items–Automatically
Represents items based on agreement with depositors– Provide items back to depositing customer
Customer subsequently re-depositsRedeposit can be through original BOFD or 2nd BOFD
Paying BankBOFD
Image Presentment
(1) Image Return
(2)
Sub Chk Re-deposit
(3)
Represented Item(3)
Depositor/Customer
Deposit Original
(1)
Sub Chk(2)
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Presentment and Returns• Item must first be presented in order to be dishonored• Image may not to be presented if it did not meet eligibility
requirements– Could have ICL containing item(s) that reject due to administrative
reasons– Items may/may not have been presented
• Examples:– Item in cash letter file did not contain both front and back of image
Item rejects in IQA – Not considered to be presentedReturned for administrative reason (Ineligible item)
– Cash letter file is processed; duplicate detection process flags several itemsImage cash letter file was presentedItems that are duplicates returned for administrative reason (Duplicate
item)
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Summary
• Proper use of return code critical for timely returns and proper handling–Refer to paper on CheckImageCentral website
on proper use of return reason codes for additional informationhttp://checkimagecentral.org/pdf/ProperUseOfReturnCodesInImageExchange.pdf
Adjustments
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Adjustments – By Agreement
• Federal Reserve Operating Circular 3 (OC3)–FRBs “Check Adjustments Services Operations
Resources” provide:Reporting timeframeRequirements for adjustment request through FRB
–Outlines specific adjustment types, related timing, documentation (DTF) requirements, etc.
• ECCHO Adjustment Rules and Matrix–Apply to Members for image exchange/return
activitiesWhether or not forward or return item exchanged under
ECCHO Rules
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Top Five Fed Adjustments
• Five adjustment types account for 93% of the cases received first six months of 2014– PAID– ENC–NCH/NCI– PEA–WIC/URCC
• Will review in this section
PAID
40%
ENC32%
NCH/NCI17%
All Other7%
WIC/URCC2%
ERR2%
Source: Federal Reserve Retail Payments Office (RPO)
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Check Adjustments• Other Adjustments under both Fed rules and private sector
rules (ECCHO Rules):– ENL – Enclosed Not Listed– LNE – Listed Not Enclosed– Informational Adjustments
OSCR – Original or Sufficient CopySOR – Source of ReceiptDISP – DispositionINFO – Information Requested
– Others• For more information refer to:– Federal Reserve online Check adjustments at: www.frbservices.org– ECCHO Adjustment Rules and Matrix (Exhibits II)
www.eccho.org/rules
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Common Adjustment Types• PAID: Duplicate paid item– Request for credit when both items have been paid
• ENC: Encoding error– Amount different than legal (written) amount; or– Written amount differs from the stated cash letter / return letter
amount• NCH: Noncash item– Includes MICR-Mismatch and NCI
• PEA: Pricing Error Adjustment– Reserved for FRB use– Fed sends to BPD to correct saving bond redemption errors
• WIC/URCC – Unauthorized Remotely Created Check claim– URCC – Warranty claim for the RCC– WIC – Warranty Indemnity Claim being a Check 21 WIC claim
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Fed OC 3 – Overview
• For cash item or returned check received from the Fed:–FRB may adjust bank’s account if bank has a claim
• FRB does not perform adjustments with respect to every type of claim–Bank may need to pursue certain claims directly
• Bank seeking adjustment via Fed must adhere to OC3 and Fed’s requirements for adjustments– Item to be adjusted must have been exchanged
through Fed
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Fed OC 3 – Overview
• Timing–Fed undertakes to handle adjustment claims and
make entries within a reasonable time after receipt• Fed assumes no responsibility for:–Determining whether the statements in forms
submitted are correct –Arbitrating disputes between banks
• Bank may be subject to criminal penalties under Federal and/or State law for knowingly making false statements to influence action of FRB
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Fed OC 3 – Overview
• Fed does not:–Process adjustments of $25.00 of less
Unless for PAID item claim;Not Our Item (NOI) claim; orError (ERR) claim (effective 6/23/14)
–Review forms to verify correct information–Handle forgeries
• See sample 2013 ”Check Adjustment Request” form on following slide
FRB – Check Adjustment Request
Four new fields for PAID item claims:• FCL1 – From Cash Letter• TCL1 – To Cash Letter• CLD1 – Cash Letter Date• SEQ1 – Seq Number
Updated :June 23, 2014
Do not submit errors of $25 or less unless request is for:• Paid Item (PAID);• Not our Item (NOI); or • Entry in Error (ERR)ERR update: Changed min. from $25.01 min to $.01- Jun-2014 update
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FRB Check Adjustment Updates
• New fields and documentation requirements associated with PAID investigation type (ITYP)–Four additional fields added to CA1000 (case open)
message on FedLine and paper adjustment form (see form/prior slide)–Certification form no longer required for single or
multiple PAID items–DTFs for single PAID item optional–DTFs for multiple PAID items still required
• Verify compliance with timing, current forms, all documentation requirements
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PAID versus DUP
• PAID vs. DUP–PAID = Same item presented and paid twice–DUP = Duplicate adjustment entry
• PAID adjustment–Used when duplicate checks have been
presented to an account• DUP adjustment–Used when a duplicate adjustment entry has
been charged to the financial institution for the same error
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FRB Adjustments: PAID ITYP• Photocopied and Original Paid (PAID)–Most prevalent adjustment type– Fed estimates of PAID adjustment requests received:
75% are both items from same depositor25% are items from two different depositors
• Duplicate image(s) and/or substitute check(s)– Receiver has choice on which item to report as duplicate
• Timing–Within six calendar months of the cash letter or return letter date
Same day entry– After six months but within one year of cash letter or return letter
dateProvide informationAdvise requesting institution to deal direct
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FRB Adjustments: ENC ITYP
• Encoding Error (ENC):– Amount different than legal (written) amount or differs
from the stated cash letter / return letter amount
• Timing–Within six calendar months of cash letter or return letter
dateSame day entry
– After six calendar months of cash letter or return letter dateNo entryProvide SOR/DISP and advise requesting institution to deal
direct
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FRB Adjustment Types
• NCH – Noncash Item–Covers both MICR Mismatch and NCI errors
• Timing:–Within 20 business days of cash letter date
Give immediate provisional entry –After 20 business days / Within six months of
cash letter dateEntry made after approval of offsetting institution
–After six monthsAdvised to deal direct
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FRB Adjustment Types
• Non-Conforming Item (NCI): Used to adjust items that fail Fed standards for image clearing–Applicable only for FedForward, FedReturn depositors
NCI can only can come from the FedBank cannot report NCI to Fed but use NCH as discussed
on prior slide• Timing–Fed will charge-back items in cash letter that:
Do not conform to Fed standard for qualityIneligible for image clearing Contains invalid routing number
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FRB Adjustments• Pricing Error Adjustment (PEA): For FRB use only – Initiated by the Fed at request of Bureau of Public Debt (BPD) –When BPD determines bond was:
Redeemed or processed for incorrect amount– Subject to standard adjustment minimum
BPD will not initiate adjustments for errors of $25 or less• Disputes Regarding PEA Adjustment–Use Entry in Error (ERR)
Institutions disputing BPD determination submit ERR adjustment request to Fed
Fed will contact BPD on institution’s behalfWill respond with correcting adjustment entry or additional
information – Further disputes, institutions will deal direct with BPD
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FRB Adjustments
• Warranty/Indemnity Claim (WIC) Associated with Unauthorized Remotely Created Checks (URCCs) –Paying institution alleges RCC not authorized in
amount stated on check to payee on check
• Timing–Within 90 calendar days cash letter date
Same day entry–After 90 calendar days
No entryAdvise requesting institution to deal direct
ECCHO Rules – Adjustments
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ECCHO Adjustment Rules
• Example of Adjustment flow– Illustrates both Members and Provider
• Adjustments types– Listed in matrix (ECCHO Rules- Exhibits II)
Member Receiving Adjustment
Adjustment Claim
Adjustment Provider
Member Sending Adjustment
Agreements
Adjustment Claim
Agreements
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ECCHO Adjustment Rules• Must comply with requirements of Adjustment Matrix– Type of Adjustment– Time periods, dollar amount or other requirements– Documentation– Settlement and rejection
• Members may make Claim directly or through Provider • Adjustments may come from:– Forward or return under ECCHO Rules or– From exchange outside ECCHO Rules but members have agreed to
adjust under Rules• Members must determine to:– Bring claim under rules or – Return, represent or make claim through other channel
• Except for Group Adjustment each claim relates to only one image or return
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ECCHO Adjustment Rules• Notification – Must notify Sending Member of receipt of
claim by end of next banking day after receipt– Notice in format and manner as agreed or established by provider
• Documentation – May be sent various ways– Can include Electronic Image or Electronic/Image Return by
sending:ImageSubstitute CheckPrint-out, photocopy, other physical representation of item
• Settlement – Members agree to process– If claim through provider, settlement of provider used
• Compensation – Not covered under these Rules– If provider allows, may make claim through provider– Optionally may make claim outside these Rules under other law
or other rules
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ECCHO Adjustment Rules• Settlement Timing (unless Members agree otherwise)– “With entry” – Settle by close of banking day following banking day
claim was received– “Without entry” – Settle by agreement of members or time period
established by provider• Reject Claim – May reject or initiate claim to reverse settlement
if claim:– Did not comply with Rules or Matrix– Did not relate to item handled by Member– Claim was duplicate of another claim– Member previously initiated claim relating to same matter– Member has not established factual basis for claim
• Rules do not establish liability for members with respect to claim• Rules do not alter Member’s obligation under UCC, Reg CC, or
Rules
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ECCHO – Check Adjustments
• Common Adjustment Types supported under ECCHO Adjustment Rules and Matrix–Duplicate – Item–Entry in Error–Amount Error–Non Conforming Image (NCI)–Unauthorized Remotely Created Check–Not Our Item (NOI)–Mis-matched MICR–Pricing Error Adjustment (PEA)
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IMAGE
Bank D
Paying Bank P
Agreement
RDC Customer
Payments Galore
Statement
Electronic EndorsementRT # of Bank D
IMAGE (ICL)
IMAGE (ICL)
IMAGE (ICL)
Statement
Federal ReserveDeposits Check
Bank E
Physical and/or Electronic Endorsement
RT # of Bank E
Electronic EndorsementRT # of FRB
Note: Banks are all members of same clearinghouse
Duplicate Item Example
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Duplicates in the Private Sector
• Two options to resolve duplicates:–Adjustment process: Duplicate – Item
Timingo 180 calendar days with entryo Up to 1 year without entry
Commonly used to report item previously paid o Both sources requiredo Adjustment typically goes to last institution to present item
–Return processUsed under administrative reason for returns at some
institutionsProvider must agree to accept administrative reason for
returns
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ECCHO Rules – Adjustments• Entry in Error– Includes Adjusting Errors and Settlement– Timing
20 business days with entryUp to 1 year without entry
• Amount Error – Legal amount– Includes Encoding error or Misread– Timing
180 calendar days with entryUp to 1 year without entry
• Non-conforming image (NCI)– Includes image missing, ineligible item, and invalid RT– Timing
20 business days with entryUp to 1 year without entry
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ECCHO Rules – Adjustments• Unauthorized Remotely Created Check – Two options under
the ECCHO Rules– Rule 8 – Warranty claim
Warranty under Reg CCo Moves liability from Paying bank to BOFD
Send through returns processo Form requiredo Specific timings to be followed
– Adjustment ProcessMirror Fed process and timingBOFD can not disclaim by stating Paying Bank’s customer authorized RCC
o Original could have been exchanged under ECCHO Rules oro Outside of ECCHO Rules and members agree to adjust under the rules
– Timing90 calendar days with entryUp to 1 year without entry
Time in Days
Payi
ngBa
nkBO
FD
11060* 75 90 1051
*60 days from availability of customer’s statement
Customer files statement within 60
calendar daysDra
win
gCu
stom
er
11060* 75 90 1051
Dep
ositi
ngCu
stom
er
ClaimDeadline to file disclaimer or request for
copy of customer statement 15 Business Days after receipt of claim
Deadline to provide copy 15 Business Days
Deadline to file disclaimer may be
extended 5 Business Days.
If not received
Requ
est C
opy
Deadline for receipt of BOFD disclaimer
or request for copy - 15 Business Days
Deadline for breach of warranty claim 15 Business Days after receipt of customer
statement. Settlement within 2 Business Days of claim
Dr customer’s account Rule 8
Dr customer’s accountRule 8
Claim
Dis
clai
mer
Send
Cop
y
Or
Rule 8 Warranty Claim Process
47
48National Check Payments Certification
ECCHO Rules – Adjustments
• Mis-matched MICR–Item forward or return has mis-match between
image of item, related physical item, or Presentment Notice (MICR data record)Sender warrants these will all be the same
o “Chain of warranties”
–Timing180 calendar days with entryUp to 1 year without entry
MICR Mis-match
0000678941234555501450000047621
Presentment Notice (MICR Data File)
Image
Does Not Equal
MICR Mismatch Example
National Check Payments Certification 49
Note: Banks are all ECCHO members
Paying BankBank A
IMAGE
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ECCHO Rules – Adjustments• Not Our Item (NOI)–Timing
90 calendar days with entryUp to 1 year without entry
• Pricing Error Adjustment (PEA)–ECCHO implemented PEA adjustment for use between
members–Timing
Deadline not applicable since ECCHO Member did not receive forward or return item
– Information requiredSame as if process through Federal Reserve
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Questions
??? ?? ?
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Recommended Resources• ECCHO Operating Rules and Commentary www.eccho.org/rules– Adjustments Matrix – Exhibits II
• “Proper Use of Return Codes in Image Exchange”: http://checkimagecentral.org/pdf/ProperUseOfReturnCodesInImageExchange.pdf
• FRB Operating Circular No. 3 (OC3) – Collection of Cash Items and Returned Checks www.frbservices.org/regulations/operating_circulars.html
• FRB Check Adjustments http://www.frbservices.org/operations/checkadjustments/quick_reference_guide.html
Thank You!
Exceptions – Returns and Adjustments
Electronic Check Clearing House Organization3710 Rawlins Street; Suite 1075
Dallas, Texas 75219
NOTICEThis 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.
Ellen Heffner, NCPDirector of Education