Depository Bank's Responsibilities

Meeting Indorsement Standards

Your first responsibility as a depositary bank comes very early in the check-collection process. It has to do with the indorsement you place on the check your customer deposits. Subpart C requires that the indorsement meet certain specifications, and here is what they are:
  1. All indorsements must be in black ink.
  2. The indorsement must be placed on the back of the check so that your routing number (which, as we will point out, is required to be in the indorsement) is contained within an area from 3.0 inches from the leading edge of the check to 1.5 inches from the trailing edge of the check. The leading edge is the right side of the check when you look at it from the front. The trailing edge is the left side, looking at the check from the front.

    If you are a reconverting bank, however, and you are printing the depositary bank indorsement on a substitute check, you must place the indorsement on the back of the check between 1.88 and 2.74 inches from the leading edge of the check. You can omit the depositary bank’s name and location from the indorsement.

  3. The indorsement MUST contain the following:
    1. Your nine-digit routing number, set off by arrows on both sides of the routing number pointing toward the routing number (if you are a reconverting bank creating a substitute check, you must also put an asterisk outside the arrows on each end of the routing number; this identifies you as a reconverting bank);
    2. Your bank name or location (if you apply the indorsement physically); and
    3. The indorsement date.
  4. The indorsement MAY contain the following:
    1. A branch identification;
    2. A trace/sequence number;
    3. A telephone number for receiving “notices of returned checks” (a notice of returned check is a notice a paying bank is required to give in some circumstances—we will discuss it as a responsibility of paying banks below); and d) Any other information which does not detract from the readability of the indorsement.

[12 CFR 229.35(a) and 12 CFR 229, Appendix D]

The reason for requiring depositary banks to include this information in their indorsements and format their indorsements in this way is to make it easy for paying banks and returning banks to identify the depositary bank to speed up its return. What’s your motive as a depositary bank for meeting the indorsement standards? Should the return of a check be delayed because the paying bank could not identify you as the depositary bank due to your failure to meet the indorsement standards, you cannot pass on to the paying bank or any returning banks the losses you incur because of the delayed return. [12 CFR 229.38(d)] The sort of loss you might incur would result from making funds available to your customer before learning that the check had not been paid. If you then are not able to charge back the amount of the check because your customer’s account does not contain enough funds and you are not able to recover the funds from your customer in some other way, you will suffer the loss yourself.

Since it’s important that your indorsement be easily readable, you might want to instruct your customers to keep their indorsements out of the areas on the backs of the checks that are reserved for your indorsements. If their indorsements encroach on your area, they could obscure your indorsement, which could result in a delayed return, posing the same problems for you as had you not met the indorsement standard. You might also want to encourage your customers to keep their indorsement and any other markings they put on the backs of the checks within the 1.5 inches next to the trailing edge. Since other banks coming later in the collection chain are required to put their indorsements in the 3.0 inches next to the leading edges of the checks, your customers’ indorsements or other information could be obscured by these indorsements if they appear in that area. This, in turn, could cause problems for your customers ranging from the obscuring of information your customers need for their own records to the paying bank returning the checks in the belief that the checks are missing your customers’ indorsements.

While the Federal Reserve Board has discouraged banks from taking too hard a line with customers who do not keep their indorsements within the 1.5 inches next to the trailing edge (see the Board’s Special Notice dated August 1988), it is to the benefit of both you and your customers for them to do so.

Many depositary banks have traditionally included in their indorsements statements such as the letters “P.E.G.” (“prior endorsements guaranteed”) or “Pay Any Bank.” Provisions in the Uniform Commercial Code (UCC) and Regulation CC now make both of these added statements unnecessary, and the Commentary to Regulation CC discourages depositary banks from including them. [Commentary, 12 CFR 229.35(a)-7] The rationale is that including these statements complicates the indorsement, making it more difficult to identify the depositary bank. The Commentary also discourages putting a nine-digit ZIP Code in the indorsement since it could easily be confused with the nine-digit routing number. [Commentary, 12 CFR 229.35(a)-5]

Finally, if you are a reconverting bank, you must also put your nine-digit routing number and the nine-digit routing number of the truncating bank on the front of the check, outside the image of the original check. The routing number of the reconverting bank must have an asterisk on either side and the routing number of the truncating bank must have a bracket on either side. Both numbers must be in accordance with ANS X9.100-140.

Accepting Return Checks

Another responsibility you have as a depositary bank is to accept return checks which were originally deposited with you. Regulation CC requires that you accept these checks at the following locations:
  1. At any location where you request the presentment of forward-collection checks; and
  2. At a location consistent with the name and address that you put in your indorsement on the check; or if you did not put an address in your indorsement, at the location associated with the routing number you put in your indorsement; or if the address in your indorsement and the address associated with the routing number you put in your indorsement are not in the same check-processing region, at a location consistent with either address; or if you did not put either an address or a routing number in your indorsement, at any branch or head office of your bank.

[12 CFR 229.32(a)]

This rule points out one of the advantages of being careful that you meet the indorsement standards we set out earlier. By including an address and routing number in your indorsement, you can limit the locations at which you are obligated to accept returned checks.

Regulation CC also allows you to enter into an agreement with a returning bank or paying bank under which you will accept an image or notice instead of the check itself, even if the check itself is available to the returning or paying bank. [Commentary, 12 CFR 229.37, C.-10] See our section under the paying bank’s responsibilities having to do with “notices in lieu of returns” for details.

Paying for Returned Checks

You must also pay for the return checks. Regulation CC requires that you pay for the checks by the close of business on the banking day on which you receive the check. The payment must take the form of cash, a debit to your account with the bank that returned the check, a wire transfer, or some other form of payment acceptable to the bank that returned the check. The proceeds of the payment, regardless of the form it takes, must be available to the bank that returned the check in cash or credit to its account on or as of the payment date. Of course, if the day you receive the check is not a banking day for the bank which returned the check to you, or if you cannot make the payment for some other reason such as receipt of the check after the close of Fedwire, you must make the payment on the next day that is a banking day for that bank. [12 CFR 229.32(b)]

This notion of “paying” for return checks is another indication of how Regulation CC intends to treat return checks more like forward-collection checks. Prior to Regulation CC, the Uniform Commercial Code viewed this transaction as a “charge-back.” Only a bank that handled the check during forward collection could return the check to you, and that bank would charge back the amount of the check when it returned it to you and would thereby revoke what had been a “provisional” settlement for the check during forward collection. Now, under Regulation CC, all settlements during the forward and return process are “final” when they are made, and when a check is returned to the depositary bank, it must “pay” for the check. There is no revocation of a prior settlement. However, this new way of looking at the return of checks only applies to relationships between banks. Your relationship with your customer has not changed, meaning that your settlement with your customer for the checks he or she deposits is still provisional, and you still can charge back the amount of a return check.

Although the return process is now more like the forward-collection process, Regulation CC prohibits you from charging any kind of fee for accepting and paying for a return check. [12 CFR 229.32(d)] The Commentary to Regulation CC says that this is a prohibition against what would basically be a “presentment” fee charged by depositary banks accepting returned checks. [Commentary, 12 CFR 229.32(d)-1] This comment leads us to believe that you are prohibited from charging other banks for accepting and paying for return checks. We do not believe this provision prohibits you from charging a fee to your customer related to the returned check. There may be other state laws that either prohibit or limit such a charge, however, so you should check for those.

Notifying your Customer of a Returned Check

Your customer has a definite interest in learning, as soon as possible, that a check that he or she has deposited has been returned unpaid. This is because the sooner your customer learns of the return, the less likely it is that the customer will write checks against those funds. Checks written against funds represented by an unpaid check will, of course, be returned themselves, which could cause all sorts of problems for your customer—ranging from embarrassment to breach of contract to criminal penalties. Also, the sooner your customer learns of the return, the more likely he or she will be able to recover the amount of the check from the person who issued it. In view of these concerns, Regulation CC requires that you notify your customer when a check that he or she deposited has been returned, or when you receive notice that the check will be returned.

The rule is that you must send or give the notice to your customer by midnight of the banking day following the banking day on which you receive the returned check or notice of nonpayment. If a longer period of time is “reasonable,” you can send the notice within the longer period. [12 CFR 229.33(d)] Presumably, you would have to establish that the longer period was reasonable under the circumstances.

Regulation CC is not specific about what the notice must say, but we would guess that you should identify the check, perhaps by number, drawer, drawee bank, and date. You should also definitely include the amount of the check, since your customer will need that information to determine the remaining available balance in the account.

Handling Misrouted Return Checks

From time to time, you might receive a returned check that was mistakenly sent to you as depositary bank when you, in fact, are not the depositary bank. Such a check needs to get to the correct depositary bank and since its return has already been delayed by the misrouting, it probably needs to get there fast if the depositary bank is going to learn of its return in the normal time frame. Regulation CC has some rules which require you to move those misrouted checks along quickly.

The rules say that you must do one of two things in this situation. First, you can send the check back to the bank that sent it to you. Or second, you can send the check to the correct depositary bank, either directly or by way of a returning bank which agrees to handle it “expeditiously” (see the next paragraph). [12 CFR 229.32(c)] Whichever of these actions you choose, Regulation CC says you must perform it “promptly,” which, according to the Commentary, means you perform it by your midnight deadline. [Commentary, 12 CFR 229.32(c)-1] The midnight deadline is midnight of the first banking day following the banking day you receive the check.

You can send the misrouted check to a returning bank rather than to the depositary bank or the bank that sent it to you only if the returning bank agrees to handle the check “expeditiously.” A returning bank agrees to handle a return check “expeditiously” if it:
  1. Publishes or distributes availability schedules for the return of checks and accepts the return check for return;
  2. Handles a return check for return that it did not handle for forward collection; or
  3. Otherwise agrees to handle a return check for expeditious return.

[Commentary, 12 CFR 229.31(a)-2]

As we will see in the sections dealing with the paying bank’s and the returning bank’s responsibilities, returning a check expeditiously means sending it in such a way so that it would normally reach its destination within certain time frames set by Regulation CC. We’ll go over the concept of expeditious return in more detail in those sections. The point here is that if you choose to send a misrouted check to the correct depositary bank by way of a returning bank, that returning bank has to have agreed to handle the check expeditiously, and it does so by meeting one of the three conditions just listed.

The next section deals with “notices of nonpayment.” Notices of nonpayment which are made in writing may also be occasionally misrouted to your bank, and the requirements for handling misrouted return checks also apply to misrouted notices of nonpayment.

Accepting Notices of Nonpayment

One of the responsibilities that a paying bank has is to notify the depositary bank whenever it decides to return a check in the amount of $2,500 or more. This notice must be received by the depositary bank by 4 P.M. (local time of the depositary bank) of the second business day after the banking day on which the check is presented to the paying bank. [12 CFR 229.33(a)] As depositary bank, you have to be prepared to receive these notices.

Since the notices can be given by telephone and telegraph [12 CFR 229.33(a)], you must accept the notices at the telephone or telegraph number that you included in the indorsement on the check that is being returned, or if you did not include a number in the indorsement, you must accept the notices at the general-purpose number of the head office or branch that you indicated in the indorsement. If you generally hold out or make known some other number for receipt of these notices, you must also accept them at that number. [12 CFR 229.33(c)]

Notices of nonpayment can also be made in writing [12 CFR 229.33(a)], and you must accept written notices at the same locations at which you are required to accept return checks. [12 CFR 33(c)] As we saw earlier, these locations are:
  1. At any location where you request the presentment of forward-collection checks; and
  2. At a location consistent with the name and address that you put in your indorsement on the check; or if you did not put an address in your indorsement, at the location associated with the routing number you put in your indorsement; or if the address in your indorsement and the address associated with the routing number you put in your indorsement are not in the same check- processing region, at a location consistent with either address; or if you did not put either an address or a routing number in your indorsement, at any branch or head office of your bank.

[12 CFR 229.32(a)]

This requirement is another example of why it is to your advantage to meet the indorsement requirements we listed earlier. You can limit the numbers and locations at which you must accept notices of nonpayment by including the desired number or address in the indorsement.

You might want to establish a fixed procedure for handling notices of nonpayment and educate people in your institution about that procedure. Since the paying bank can give notices, telegraph or mail, a number of different people in your institution may actually receive the notice. These people need to know that the information in the notice must be quickly passed on to the people in the institution who must take action in response to it.