National Check Payments Certification Exceptions – Returns - PowerPoint Presentation

National Check Payments Certification Exceptions – Returns and Adjustments Copyright© 2014 by the Electronic Check Clearing House Organization NCP 2015 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 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 2

Session Overview Exceptions OverviewReturnsAdjustmentsFederal Reserve Bank – AdjustmentsECCHO Rules – Adjustments National Check Payments Certification 3

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.5National 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 6

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 Certification7

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 8

Return 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 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 9

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 10

Types of Image Returns Customer and Administrative ReturnsCustomer ReturnsMay be called monetary returnsDishonored item under check lawUsually attempt charge to customer accountAdministrative Returns/Administrative reasons May be called non-monetary returnsReturn for reason other than dishonored itemUsually handled internally rather than charged to customer Can also be handled through adjustment processIf handled as returnMust adhere to legal requirements for return itemAll Returns Carry Monetary Value11 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’12 National Check Payments Certification

Return Reason Codes / Duplicates Need to use return reasons in electronic indorsement recordsHelps identify represented itemsHelps prevent false “positives” in duplicate checkingFollowing slides offer brief review of forward/return “flipping” of indorsement recordsCovered in prior session 13 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 14

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 15

Return Routing Hierarchy ECCHO Rules National Check Payments Certification 16

Represented Items Depositary Bank may represent itemsAutomaticallyRepresents items based on agreement with depositorsProvide items back to depositing customer Customer subsequently re-depositsRedeposit can be through original BOFD or 2nd BOFD Paying Bank BOFD Image Presentment (1) Image Return (2) Sub Chk Re-deposit (3) Represented Item (3) Depositor/ Customer Deposit Original (1) Sub Chk (2) National Check Payments Certification 17

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 Certification18

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 Certification19

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 21

Top Five Fed Adjustments Five adjustment types account for 93% of the cases received first six months of 2014 PAIDENCNCH/NCI PEAWIC/URCCWill review in this section Source: Federal Reserve Retail Payments Office (RPO) National Check Payments Certification 22

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 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

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 National Check Payments Certification25

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 Certification26

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 Certification27

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 itemsDTFs for single PAID item optionalDTFs for multiple PAID items still requiredVerify compliance with timing, current forms, all documentation requirementsNational Check Payments Certification29

PAID versus DUP PAID vs. DUPPAID = Same item presented and paid twiceDUP = Duplicate adjustment entryPAID adjustmentUsed when duplicate checks have been presented to an accountDUP adjustment Used when a duplicate adjustment entry has been charged to the financial institution for the same error National Check Payments Certification30

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 TimingWithin 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

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 National Check Payments Certification 32

FRB Adjustment Types 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 direct33National Check Payments Certification

FRB Adjustment Types Non-Conforming Item (NCI): Used to adjust items that fail Fed standards for image clearingApplicable 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 slideTimingFed will charge-back items in cash letter that: Do not conform to Fed standard for qualityIneligible for image clearing Contains invalid routing number34National Check Payments Certification

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 amountSubject to standard adjustment minimum BPD will not initiate adjustments for errors of $25 or lessDisputes Regarding PEA AdjustmentUse 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 35

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 entryAfter 90 calendar daysNo entryAdvise requesting institution to deal direct National Check Payments Certification 36

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 38

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, represent or make claim through other channelExcept for Group Adjustment each claim relates to only one image or returnNational Check Payments Certification 39

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 covered under these RulesIf provider allows, may make claim through providerOptionally may make claim outside these Rules under other law or other rulesNational Check Payments Certification 40

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 41

ECCHO – Check Adjustments Common Adjustment Types supported under ECCHO Adjustment Rules and MatrixDuplicate – Item Entry in ErrorAmount ErrorNon Conforming Image (NCI)Unauthorized Remotely Created Check Not Our Item (NOI)Mis-matched MICRPricing Error Adjustment (PEA)National Check Payments Certification 42

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 43

Duplicates in the Private Sector Two options to resolve duplicates:Adjustment process: Duplicate – ItemTiming180 calendar days with entryUp to 1 year without entry Commonly used to report item previously paid Both sources requiredAdjustment 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 returnsNational Check Payments Certification44

ECCHO Rules – Adjustments Entry in ErrorIncludes Adjusting Errors and SettlementTiming 20 business days with entryUp to 1 year without entry Amount Error – Legal amountIncludes Encoding error or MisreadTiming180 calendar days with entryUp to 1 year without entryNon-conforming image (NCI) Includes image missing, ineligible item, and invalid RT Timing 20 business days with entry Up to 1 year without entryNational Check Payments Certification45

ECCHO Rules – Adjustments Unauthorized Remotely Created Check – Two options under the ECCHO RulesAdjustment ProcessMirror 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 entryUp to 1 year without entryRule 8 – Warranty claimWarranty 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 updates to Section XIX(N) (Rule 8) [ECCHO Rules: Dec-2014] 46 National Check Payments Certification

ECCHO Rules – Adjustments 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 47

MICR Mis-match 000067894 12345555 014500000 47621 Presentment Notice (MICR Data File) Image Does Not Equal MICR Mismatch Example National Check Payments Certification 48 Note: Banks are all ECCHO members Paying Bank Bank A IMAGE

ECCHO Rules – Adjustments Not Our Item (NOI)Timing90 calendar days with entryUp to 1 year without entry Pricing Error Adjustment (PEA)ECCHO implemented PEA adjustment for use between members TimingDeadline not applicable since ECCHO Member did not receive forward or return itemInformation requiredSame as if process through Federal ReserveNational Check Payments Certification 49

Questions ? ? ? ? ? ? National Check Payments Certification 50

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 51

Thank You! Exceptions – Returns and Adjustments Electronic Check Clearing House Organization 3710 Rawlins Street; Suite 1075Dallas, Texas 75219NOTICE 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 . Ellen Heffner, NCP Director of Education eheffner@eccho.org 214-273-3211