Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Re: Docket No. R-1226; proposed amendments to Regulation CC
Dear Ms. Johnson:
On behalf of the Community Bankers Association of Illinois (hereinafter, "CBAI"), I am submitting this comment letter in support of the proposed amendments to Regulation CC published by the Board of Governors of the Federal Reserve System (Federal Register Vol. 70, No. 42, at Page 10509). With more than 500 financial institutions in its membership and 144 associate members (i.e., law firms, accounting firms, consultants, and other businesses or persons providing professional, technical, or marketing support services to member financial institutions), CBAI is the third largest state-organized financial institution trade association in the United States. CBAI member financial institutions can be found in each of Illinois' 102 counties. They include state-chartered banks, national banks, state-chartered savings associations, state-chartered savings banks and federal savings associations. CBAI member financial institutions range in size from $4.4 million in total assets to nearly $3 billion in total assets. These financial institutions, and their deposit accountholders, have a direct interest in the proposed amendments to Regulation CC affecting "remotely created checks." Community banks are seeing an increase in the use of remotely created checks as financial institution customers become more accustomed to doing business (e.g., authorizing payments) by telephone, computer or other electronic means. The proposal by the Federal Reserve is, in CBAI's opinion, both timely and appropriate. The proposed amendments to Regulation CC will, if adopted, clarify the rights and obligations of financial institutions that accept, transfer and pay these items. The proposal also will more equitably assign the liability exposure for unauthorized remotely created checks by creating transfer and presentment warranties that do not currently apply to such unauthorized items. As noted in the Federal Reserve's published notice regarding the proposed amendments, remotely created checks can be beneficial payment devices for accountholders. They can expedite payments so that the accountholder avoids late charges and related consequences when a conventional form of payment might not reach the seller or creditor prior to a payment due date. However, unlike the conventional check payment system, these remotely created checks do not bear the accountholder's signature. Because no accountholder signature appears on a remotely created check, there is no ability for the drawee/payor bank to verify whether the item even has the appearance of being actually authorized by its customer. The drawee/payor bank must place complete reliance on the credibility of the person who created the item, because if the drawee/payor bank does not return the remotely created check before its "midnight deadline" the drawee/payor bank will in almost all situations bear the risk of loss when the item is later identified as being unauthorized. Although drawee/payor banks routinely face this liability exposure with forged checks wrongfully drawn on their customers' accounts, in those cases the law has long established that the drawee/payor bank bears such risk because of its legal (although often theoretical) ability and responsibility to only pay checks that actually bear the signature of its accountholder consistent with the account signature card. Because remotely created checks pose different obstacles regarding verification (i.e., no accountholder signature), there is no reason to treat the risk of loss and the apportionment of liability the same as in the cases of forged checks. Furthermore, when a remotely created check is fraudulently created by a wrongdoer, it is more likely that the bank of deposit (rather than the drawee/payor bank) will know the wrongdoer and be able to locate and hopefully recover from him or her. The Federal Reserve's proposal to create presentment and transfer warranties will shift the risk of loss from the drawee/payor bank to the bank(s) that accepted the item and/or transferred it to the drawee/payor bank. Although all financial institutions that handle the unauthorized item may be innocent and may have acted in good faith, on balance the equitable considerations favor providing a remedy for the drawee/payor bank when a remotely created check is ultimately presented for payment and the drawee/payor bank subsequently learns that the item was not authorized by its accountholder. CBAI and its member financial institutions appreciate the fact that the Federal Reserve is taking an active role in attempting to address an issue that affects many community banks throughout Illinois and throughout the United States. We support adoption of the Federal Reserve's proposed amendments to Regulation CC. The only modification that CBAI would offer for consideration by the Federal Reserve relates to the definition of "remotely created check" in proposed new paragraph (fff) in Section 229.2. That proposed definition appears as follows:
"(fff) Remotely created check means a check that is drawn on a customer account at a bank, is created by the payee, and does not bear a signature in the format agreed to by the paying bank and the customer."
The above definition suggests that to be covered by this amended regulation, and thus to trigger the presentment or transfer warranties, the remotely created check must be "created by the payee." It is possible that a wrongdoer might have a service provider or some other third party create the item so that the wrongdoer is not directly involved. Such occasions should not alter the fact that the proposed warranties are still applicable. CBAI has noted that the Federal Reserve addresses this matter in its proposed new commentary in the Appendix to Part 229, wherein the commentary clarifies that:
"In accordance with principles of the law of agency, an agent of a payee is deemed to be the payee for purposes of the definition of remotely created checks."
While the above commentary supplements the definition in proposed paragraph (fff) in Section 229.2, reference to the commentary would be less necessary if the clarification were to be included in the definition itself. Because the Federal Reserve is creating this new definition from a clean slate, the opportunity now exists to make a minor modification that would underscore the fact that a remotely created check could be created by a knowing or unknowing accomplice of the payee. CBAI recommends that the phrase "is created by or on behalf of the payee" be substituted for the currently proposed phrase "is created by the payee" in the definition of "remotely created check." This recommendation, however, is not intended to imply that CBAI does not support the amendments to Regulation CC as proposed. CBAI thanks the Board of Governors of the Federal Reserve for this opportunity to comment on the proposal and for the consideration of this comment letter. If you have any questions regarding this comment letter or would like any additional information from CBAI, please feel free to contact me. Sincerely,
Jerry D. Cavanaugh
Community Bankers Association of Illinois
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