National Check Payments Certification Exceptions – Returns - PowerPoint Presentation

National Check Payments Certification Exceptions – Returns and Adjustments Copyright© 2015 by the Electronic Check Clearing House Organization NCP 2016 Exam Cycle Core Training Series Session 8

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 materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO.Copyright© 2015 by the Electronic Check Clearing House Organization(Certain contributed content subject to third party copyrights) National Check Payments Certification 2

NCP Exam Registration Reminder 3 Register with ECCHO online at: store.eccho.org View detailed exam info at: www.eccho.org/ncpc Free ECCHO / NCP study aids upon registration!P.R.E.P. Guide: 300+ pages of information, training guide, sample examQuestion of the Day: Summary available now New daily question & detailed answer to prior day’s question Email delivery beginning in January NCP Roadmap – Direction on establishing a personal study plan JumpStart Reading Program – Links to all referencesExam Fees: $400 ECCHO member $500 non-ECCHO memberNot sure about membership?Check current status at: www.eccho.org/membershipsEnter name in search box on left National Check Payments Certification

Session Topics Exceptions OverviewReturnsAdjustmentsFederal Reserve Bank – AdjustmentsECCHO Rules – Adjustments National Check Payments Certification 4

Exceptions Overview

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 determinedReturns and adjustments are exceptionsReturn – Item that is dishonored by Paying Bank Must have specific return reasonAdjustment – Correction for error(s) generally caused during item processingMay involve research to resolve multiple errors Ex: Mis-encoding, mis-routing, incorrect posting, etc.6National Check Payments Certification

Governing Rules & Regulations Returns – Governed by statutory and regulatory requirementsUCC midnight deadline (UCC 4-301)Reg CC expeditious return requirement (§ 229.30) Adjustments – Handled “by agreement” of the partiesFed OC 3 rulesClearing house rulesThird party providers for operational procedures and settlementNational Check Payments Certification 7

Return or Adjust? An error has occurred – as the Paying Bank your return clocks are tickingUCC 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?National Check Payments Certification8

Return vs. Adjustment Adjustments Considerations Made to appropriate party Minimizes negative impact to customersHandled within banking systemAdjustment areas familiar with processCan be less efficient than returnSettlement 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 Bank BOFD IMAGE Deposit Chk Image Adjustment Image Return or Sub Chk Drawer Customer Duplicates Sub Chk Return IMAGE Depositing Customer Caused Duplicate 9 National Check Payments Certification

Returns Considerations Faster – Timely Settlement Do not lose right of returnIn remote capture environment (RDC), speed is a consideration if unsure of cause of duplicateMay have negative customer impacts Depositing customer and/or drawer customerReturn vs. Adjustment Paying Bank BOFD IMAGE Deposit Chk Image Adjustment Image Return and or Sub Chk Drawer Customer Duplicates IMAGE Depositing Customer Caused Duplicate Sub Chk Return 10 National Check Payments Certification

Exceptions – Returns Return items may be directed back to:BOFD, or Prior collecting or presenting bankReturns processes dependent on channel used and agreements in place Must still follow regulatory requirementsFor expeditious return, check must be received at depositary bank by 4:00 pm 2nd business day following banking day of presentmentReg CC requires Paying Bank:Identify return and reason for returnClearly indicate reason for returnIf substitute check, place information within image on front of substitute checkNational Check Payments Certification 11

Types of Image Returns Customer and Administrative ReturnsCustomer ReturnsMay be called monetary returnsDishonored item under check lawUsually attempt charge to customer account Administrative Returns/Administrative reasonsMay be called non-monetary returnsReturn for reason other than dishonored item Usually handled internally rather than charged to customerCan also be handled through adjustment processIf handled as returnMust adhere to legal requirements for return itemAll Returns Carry Monetary Value12 National Check Payments Certification

Reasons for Return Common Return Reason CodesCustomer Return ReasonsNSF – 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’13 National Check Payments Certification

Return Reason Codes / Duplicates Need to use return reasons in electronic indorsement recordsHelps identify re-presented itemsHelps prevent false “positives” in duplicate checkingFollowing slides offer brief review of forward/return “flipping” of indorsement recordsCovered in prior session 14 National Check Payments Certification

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 ) National Check Payments Certification 15

31/33 26 * 32 X9.100-187 Flows Return “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 National Check Payments Certification 16

Return Routing Hierarchy ECCHO Rules National Check Payments Certification 17

Re-presented Items Depositary Bank may re-present itemsAutomatically re-presents items based on agreement with depositorsProvide items back to depositing customer Customer subsequently re-deposits Redeposit can be through original BOFD or 2nd BOFD 18National Check Payments Certification Paying Bank BOFD Image Presentment (1) Image Return (2) Sub Chk Re-deposit (3) Re-presented Item (3) Depositor/ Customer Deposit Original (1) Sub Chk (2)

Presentment and Returns Item must first be presented in order to be dishonoredImage may not to be presented if it did not meet eligibility requirementsCould have ICL containing item(s) that reject due to administrative reasonsItems may/may not have been presentedExamples:Item in cash letter file did not contain both front and back of imageItem rejects in IQA – Not considered to be presentedReturned for administrative reason (Ineligible item ) Cash letter file is processed; duplicate detection process flags several items Image cash letter file was presented Items that are duplicates returned for administrative reason (Duplicate item)National Check Payments Certification19

Summary Proper use of return code critical for timely returns and proper handlingRefer to paper on CheckImageCentral website on proper use of return reason codes for additional information http://checkimagecentral.org/pdf/ProperUseOfReturnCodesInImageExchange.pdf National Check Payments Certification20

Adjustments

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 MatrixApply to Members for image exchange/return activitiesWhether or not forward or return item exchanged under ECCHO RulesNational Check Payments Certification 22

Top Five Fed Adjustments Three adjustment types account for over 90% of cases received in first six months of 2015PAIDENC NCH/NCI Source: Federal Reserve Retail Payments Office (RPO) National Check Payments Certification 23

Common Adjustment Types PAID: Duplicate paid itemRequest for credit when both items have been paidENC: Encoding errorAmount different than legal (written) amount; or Written amount differs from the stated cash letter / return letter amountNCH: Noncash itemIncludes MICR-Mismatch and NCIPEA: Pricing Error Adjustment Reserved for FRB useFed sends to BPD to correct saving bond redemption errorsWIC/URCC – Unauthorized Remotely Created Check claimURCC – Warranty claim for the RCCWIC – Warranty Indemnity Claim being a Check 21 WIC claimNational Check Payments Certification 24

Check Adjustments Other Adjustments under both Fed rules and private sector rules (ECCHO Rules):ENL – Enclosed Not ListedLNE – Listed Not EnclosedInformational AdjustmentsOSCR – Original or Sufficient Copy SOR – Source of ReceiptDISP – DispositionINFO – Information Requested OthersFor more information refer to:Federal Reserve online Check adjustments at: www.frbservices.orgECCHO Adjustment Rules and Matrix (Exhibits II)www.eccho.org/rules National Check Payments Certification 25

Fed OC 3 – Overview For cash item or returned check received from the Fed:FRB may adjust bank’s account if bank has a claimFRB does not perform adjustments with respect to every type of claimBank may need to pursue certain claims directlyBank seeking adjustment via Fed must adhere to OC3 and Fed’s requirements for adjustments Item to be adjusted must have been exchanged through Fed 26National Check Payments Certification

Fed OC 3 – Overview TimingFed undertakes to handle adjustment claims and make entries within a reasonable time after receiptFed assumes no responsibility for:Determining whether the statements in forms submitted are correct Arbitrating disputes between banksBank may be subject to criminal penalties under Federal and/or State law for knowingly making false statements to influence action of FRB National Check Payments Certification27

Fed OC 3 – Overview Fed does not:Process adjustments of $25.00 of lessUnless for PAID item claim;Not Our Item (NOI) claim; orError (ERR) claim (effective 6/23/14) Review forms to verify correct informationHandle forgeriesSee sample 2013 ”Check Adjustment Request” form on following slide National Check Payments Certification28

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 NumberUpdated :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

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 optionalDTFs for multiple PAID items still requiredVerify compliance with timing, current forms, all documentation requirements 30National Check Payments Certification

FRB Adjustments: PAID ITYP Photocopied and Original Paid (PAID)Most prevalent adjustment typeFed estimates of PAID adjustment requests received:75% are both items from same depositor 25% are items from two different depositorsDuplicate 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 dateSame day entryAfter six months but within one year of cash letter or return letter dateProvide informationAdvise requesting institution to deal directNational Check Payments Certification 31

PAID versus DUP PAID = Same item presented and paid twicePAID adjustment type used when duplicate items have been presented to an accountDUP = Duplicate adjustment entry Used when a duplicate adjustment entry has been charged to financial institution for the same error National Check Payments Certification32

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 date Same day entry After six calendar months of cash letter or return letter dateNo entryProvide SOR/ DISP and advise requesting institution to deal direct National Check Payments Certification 33

FRB Adjustments: NCH ITYP NCH – Noncash ItemCovers both MICR Mismatch and NCI errorsTiming: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 direct34National Check Payments Certification

FRB Adjustments: NCI ITYP Non-Conforming Item (NCI): Used to adjust items that fail Fed standards for image clearingApplicable only for FedForward, FedReturn depositorsNCI can only can come from the FedBank cannot report NCI to Fed but use NCH as discussed on prior slideTiming Fed will charge-back items in cash letter that:Do not conform to Fed standard for qualityIneligible for image clearing Contains invalid routing number35 National Check Payments Certification

FRB Adjustments: PEA ITYP 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 minimumBPD will not initiate adjustments for errors of $25 or lessDisputes Regarding PEA Adjustment Use Entry in Error (ERR) Institutions disputing BPD determination submit ERR adjustment request to FedFed will contact BPD on institution’s behalfWill respond with correcting adjustment entry or additional information Further disputes, institutions will deal direct with BPDNational Check Payments Certification 36

FRB Adjustments: WIC/URCC ITYP 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 checkTiming Within 90 calendar days cash letter date Same day entryAfter 90 calendar daysNo entryAdvise requesting institution to deal direct National Check Payments Certification 37

ECCHO Rules – Adjustments

ECCHO Adjustment Rules Example of Adjustment flowIllustrates both Members and ProviderAdjustments types Listed in matrix (ECCHO Rules- Exhibits II) Member Receiving Adjustment Adjustment Claim Adjustment Provider Member Sending Adjustment Agreements Adjustment Claim Agreements National Check Payments Certification 39

ECCHO Adjustment Rules Must comply with requirements of Adjustment MatrixType of AdjustmentTime periods, dollar amount or other requirementsDocumentation Settlement and rejectionMembers may make Claim directly or through Provider Adjustments may come from: Forward or return under ECCHO Rules orFrom exchange outside ECCHO Rules but members have agreed to adjust under RulesMembers must determine to:Bring claim under rules or Return, re-present or make claim through other channelExcept for Group Adjustment each claim relates to only one image or returnNational Check Payments Certification 40

ECCHO Adjustment Rules Notification – Must notify Sending Member of receipt of claim by end of next banking day after receiptNotice in format and manner as agreed or established by providerDocumentation – May be sent various waysCan include Electronic Image or Electronic/Image Return by sending: ImageSubstitute CheckPrint-out, photocopy, other physical representation of item Settlement – Members agree to processIf claim through provider, settlement of provider usedCompensation – Not currently covered under these RulesIf provider allows, may make claim through providerOptionally may make claim outside these Rules under other law or other rules41 National Check Payments Certification

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 MatrixDid not relate to item handled by Member Claim was duplicate of another claimMember previously initiated claim relating to same matterMember has not established factual basis for claimRules do not establish liability for members with respect to claimRules do not alter Member’s obligation under UCC, Reg CC, or RulesNational Check Payments Certification 42

ECCHO Adjustment Types Common Adjustment Types supported under ECCHO Adjustment Rules and MatrixDuplicate – Item Entry in ErrorAmount ErrorClaim of Damage Due To Under EncodingUnauthorized Remotely Created Check Mis-matched MICRNon Conforming Image (NCI)Not Our Item (NOI)Pricing Error Adjustment (PEA)National Check Payments Certification 43

ECCHO Adjustment Types Duplicate-Item: Item presented twice Regardless of form – may be two images, image and IRD, etc.)If created from same original physical item, asked to pay the same item again, it is a duplicateTiming: 180 calendar days with entry Up to 1 year without entryBoth sources requiredAdjustment typically goes to last institution to present item 44National Check Payments Certification

IMAGE Bank D Paying Bank P Agreement RDC Customer Payments Galore Statement Electronic Endorsement RT # of Bank D IMAGE (ICL) IMAGE (ICL) IMAGE (ICL) Statement Federal Reserve Deposits Check Bank E Physical and/or Electronic Endorsement RT # of Bank E Electronic Endorsement RT # of FRB Note: Banks are all members of same clearinghouse Duplicate Item Example National Check Payments Certification 45

Duplicates in the Private Sector Two options to resolve duplicates:Adjustment process: Duplicate – ItemTo report item previously paid Return process: Customer return reason “Y ” – Duplicate Presentment  If sent as an Administrative reason for return, use same return reason “Y” Parties must agree to acceptNational Check Payments Certification46

ECCHO Adjustment Types Entry in ErrorIncludes Adjusting Errors and SettlementTiming: 20 business days with entryUp to 1 year without entry Amount Error – Legal amountIncludes Encoding error or Misread Timing: 180 calendar days with entryUp to 1 year without entryNational Check Payments Certification 47

ECCHO Adjustment Types Claim of Damage Due to Under-encodingSending Bank warrants the encoding after issue under Reg CC warrantiesIf Receiving Member/Paying Bank cannot collect adjusted item amount and suffers a loss, Paying Bank has the claimFederal Reserve minimum $ amount Timing: 20 business days with entryUp to 1 year without entry 48National Check Payments Certification

Paying Bank BOFD Deposit Check Encoding Adjustment Claim of Damage Due to Under-encoding Check for $295.45 – Under-encoded for $200 Paying Bank unable to collect Has claim to BOFD 49 Depositing Customer Under Encoded BOFD Warrants Correct Amount Claim of Damage Due to Under-encoding Adjustment Customer Statement Account Closed or Insufficient Funds Customer Received Credit for the Correct Amount ($295.45) IMAGE Statement National Check Payments Certification

ECCHO Adjustment Types Unauthorized Remotely Created Check OptionsAdjustment Process [Section XII)]Mirror Fed process and timingBOFD can not disclaim by stating Paying Bank’s customer authorized RCC Original could have been exchanged under ECCHO Rules orOutside of ECCHO Rules and members agree to adjust under the rulesTiming: 90 calendar days with entry Up to 1 year without entryRule 8 – Warranty claim [Section XIX(N)]Warranty under Reg CCMoves liability from Paying bank to BOFD Send through returns process to location BOFD receives returnsForm required; Specific timings to be followedSee session: “Image Exchange: Rules and Agreements–Part I” for more details on Rule 8 50 National Check Payments Certification

ECCHO Adjustment Types Mis-matched MICRItem 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“Chain of warranties”Timing180 calendar days with entryUp to 1 year without entryNational Check Payments Certification 51

MICR Mis-match 000067894 12345555 014500000 47621 Presentment Notice (MICR Data File) Image Does Not Equal Mis -matched MICR National Check Payments Certification 52 Note: Banks are all ECCHO members Paying Bank Bank A IMAGE

ECCHO Adjustment Types Non-conforming image (NCI)Includes image missing, ineligible item, and invalid RTTiming: 20 business days with entryUp to 1 year without entryNot Our Item (NOI)Timing 90 calendar days with entryUp to 1 year without entryPricing Error Adjustment (PEA)ECCHO implemented PEA adjustment for use between membersTimingDeadline not applicable since ECCHO Member did not receive forward or return itemInformation required Same as if process through Federal Reserve National Check Payments Certification 53

Summary Various adjustment types permitted via either Federal Reserve or private sectorFed and ECCHO Adjustment TypesMay have similar names; May have same $ min. for same type of adjustment Timing for “with entry” claim may / may not be the same for same type of adjustment (see examples in table) 54 National Check Payments Certification

Questions ? ? ? ? ? ? National Check Payments Certification 55

Recommended Resources ECCHO Operating Rules and Commentary www.eccho.org/rulesAdjustments 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 National Check Payments Certification 56

Thank You! Exceptions – Returns and Adjustments Electronic Check Clearing House Organization 3710 Rawlins Street; Suite 1075Dallas, Texas 75219NOTICEThis NCPC Program document contains copyrighted materials of its publisher. These materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO Copyright© 2015 by the Electronic Check Clearing House Organization Ellen Heffner, NCP Director of Education eheffner@eccho.org 214-273-3211