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March 23, 2018

Matrix of Proposed Revisions to ECCHO Rules

This Matrix summarizes the proposed material revisions to the ECCHO Rules in connection with the rules update to reflect the amendments to Regulation CC which will take effect on July 1, 2018. The Matrix does not identify all proposed changes to the ECCHO Rules. For example, it does not identify/discuss all the places in the ECCHO Rules where defined terms are substituted with new proposed defined terms. A marked copy of the ECCHO Rules, dated March 23rd, contains all proposed changes to the Rules, and has been distributed with this version of the Matrix.

As used in the Matrix, the phrase “current” ECCHO Rules refers to the ECCHO Rules in effect today. The terms “revised,” “revision” or “changes” refer to proposed changes to the ECCHO Rules under consideration by the ECCHO Operations Committee.

The ECCHO Rules changes summarized below are draft proposed rules under consideration by the ECCHO Operations Committee. No rule change is final until adopted by the ECCHO Business Committee. Please send any written comments regarding the proposed rules changes to Jenny Johnson at [email protected]

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The below is a summary of the material changes to the Matrix from the draft of Matrix reviewed by the Regulation CC Work Group on its January 29, 2018 conference call:

Section XII(D) – Adjustment Rules: Revised to reflect new time period for informational adjustments.

Section XVIII(O) – Exchange of Images of Canadian Items: Revised to add cross reference to Reg CC warranties.

Section XIX(L) – Sending Bank Warranties and Indemnification. Addition of new Commentary to explain how the image quality warranty under Section 229.34(a)(1) of amended Regulation CC addresses security features of a check.

Section XIX(L) – Sending Bank

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Part 1: Proposed Rules Changes For Section I to Section XVIII of the Rules

Section # Proposed Revision Explanation of Proposed Revision

Section I

Various Definitions Relating to Image

Former Section I(A) (Page 3)

Former Section I(GG)

(Page 9)

Former Section I(LLL)

(Page 13)

Former Section I(VV)

(Page 11)

Deleted definition of “Acceptable Copy of Related Physical Check.”

Deleted definition of “Legibility.”

Deleted definition of “Usability.”

Deleted definition of “Regulation CC Notice of Non-Payment.”

These first three defined terms are used in the current ECCHO warranties in Section XIX(L) to address image quality/usability.

A proposed revision to Section XIX(L) removes these ECCHO warranties and relies on the new Electronic Check warranties contained in Regulation CC, Section 229.34(a). As a result of the proposed change to Section XIX(L), these defined terms will not be needed.

As a related matter, the image quality standard exhibit will remain in the ECCHO Rules as an informational resource. This exhibit is not linked to a warranty or a formal requirement under the draft ECCHO Rules.

The defined term “Regulation CC Notice of Non-Payment” is no longer used in Rules as a result of other changes to Rules to reflect Reg CC amendments.

New Definition of Electronic Check

Draft Section I(V)

(Page 7)

Added new defined term “Electronic Check.”

Added Commentary to new definition.

New definition incorporates the defined term “Electronic Check” from Regulation CC.

This defined term replaces the defined term “Electronic Image” throughout the ECCHO Rules (primarily in Section XIX).

New Commentary explains relationship of “Electronic Check” term to the new defined terms “Electronic Information” and “Image.”

New Definition of Electronic Returned Check

Draft Section I(X)

(Page 7)

Former Section I(U)

(Page 7)

Former Section I(EE)

(Page 9)

Added new defined term of “Electronic Returned Check.”

Deleted definition of “Electronic/Image Return.”

Deleted definition of “Image Return.”

Added Commentary to new definition of Electronic Returned Check.

New definition of “Electronic Returned Check” incorporates the defined term “Electronic Returned Check” from Regulation CC.

This new defined term replaces the current defined term “Electronic/Image Return” and “Image Return” throughout the ECCHO Rules (primarily in Section XX).

New Commentary states that ECCHO Rules definition of Electronic Returned Check matches the same defined term under Regulation CC. Also explains relationship of the defined terms “Image” and “Electronic Information” to the term “Electronic Returned Check.”

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New Definition of Electronic Information (formerly Presentment Notice)

Draft Section I(W)

(Page 7)

Former Section I(QQ)

(Page 11)

Revised and renamed defined term “Presentment Notice.” Renamed as new defined term “Electronic Information.”

Revised Commentary to the term “Presentment Notice” to reflect new definition.

The new defined term “Electronic Information” revises and replaces the current defined term “Presentment Notice.”

Added new Commentary to this defined term to state that “Electronic Information” refers to electronic MICR line and electronic bank indorsements.

This new defined term “Electronic Information” replaces the current defined term “Presentment Notice” throughout Section XIX.

In Section XX, this new defined term “Electronic Information” replaces the undefined references to “electronic information” or “electronic file” accompanying the Electronic Returned Check.

New Definition of Electronically Created Item(ECI)

Draft Section I(T)

(Pages 7 and 17)

Added new defined term “Electronically Created Item.”

Added new Commentary to this definition.

Added new defined term for ECI based on Regulation CC definition of same term.

There are no proposed new rules in the main body of the ECCHO Rules to address ECIs.

New Commentary states that (i) ECIs are not eligible for exchange under the ECCHO Rules, and (ii) there is the potential for ECCHO warranty breach by a bank sending ECIs.

Definition of Electronic Message Return

Former Section I(W)

(Page 7)

Deleted defined term “Electronic Message Return.”

Proposed change to Section XX deletes the option of a returning bank to use an electronic message return (without the corresponding check image).

With the proposed deletion of the option of a “message only” return under Section XX, the defined term “Electronic Message Return” is not needed.

Definition of Not Our Item (NOI)

Draft Section I(JJ)

Former Section I(JJ)

(Page 9)

Revised the defined term “Not Our Item/NOI.”

Revised definition of NOI to change phrase “subsequent Collecting Bank” to “any Collecting Bank in the forward collection of the same item.”

Revisions intended to clarify definition. Not related to Reg CC amendment rules changes.

Definition of Sending Bank

Draft Section I(EEE)

Former Section I(EEE)

(Page 12)

Revised the defined term “Sending Bank.”

Revised definition of “Sending Bank” to directly refer to the sending of “Electronic Checks,” instead of sending of “items.”

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Definitions of Image and Electronic Image

Draft Section I(DD)

(Page 9)

Former Section I(T)

(Page 9)

Former Section I(CC)

(Page 9)

Revised the defined term “Image” and deleted defined term “Electronic Image.”

Revised definition of term “Image” to include portions of the prior definitions of both “Image” and “Electronic Image.”

The new defined term “Image” is used in Rules to refer to the image portion of the Electronic Check (without the related Electronic Information).

When the Image is combined with the “Electronic Information,” they form the “Electronic Check” or the “Electronic Returned Check”, as applicable.

This drafting approach to having separate terms for “Image” and “Electronic Information” tracks Regulation CC which defines “Electronic Check” as consisting of an image and electronic information derived from the paper check.

Definition of Electronic Indorsement

Draft Section I(V)

Former Section I(V)

(Page 7)

Revised the defined term “Electronic Indorsement.”

Revised definition of term “Electronic Indorsement” to include reference to the indorsement requirements under Regulation CC. Reg CC now applies the industry standard for indorsements as a matter of law to Electronic Indorsements on Electronic Checks.

Definition of MICR Line

Draft Section I(HH)

(Page 9)

Added new definition of “Magnetic Ink Character Recognition Line or MICR line.”

Added defined term for MICR line based on amended Regulation CC definition.

Definition of Related Physical Check

Draft Section I(WW)

Former Section I(WW)

(Page 11)

Revised defined term “Related Physical Check.”

Revised current definition of “Related Physical Check” to include concept of the paper item from which the Image or Electronic Information is “derived.” This change tracks the Regulation CC definition of “Electronic Check” which uses the phrase “derived” from the paper check.

Definitions of Returnee Member and Returning Member

Draft Section I(YY)

Draft Section I(ZZ)

Former Section I(YY)

Former Section I(ZZ)

(Pages 11-12)

Revised the defined terms “Returnee Member” and “Returning Member.”

Revised the defined terms “Returnee Member” and “Returning Member” to make them shorter. No substantive change is intended.

Section I – Section XVIII

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Section I through Section XVIII

(Pages 3 - 134)

Changes to defined terms throughout Rules.

Made revisions throughout Section I through Section XVIII to conform to new defined terms from Section I. For example, replaced “Electronic Image” with “Electronic Check” in various places in Rules.

Section II

Section II(A)

Transition to ECCHO Rules

(Pages 20 - 21)

Added new section to provide cross reference of key terms between 2016 ECCHO Rules and proposed 2018 ECCHO Rules.

It is expected that many Members’ have bilateral exchange agreements and business practices agreement (BPAs) in place today which use the defined terms from the 2016 ECCHO Rules. For example, a BPA may expressly refer to “Electronic Images” and “Presentment Notices.”

This new proposed Section II(A) provides a cross reference between the defined terms in the 2016 ECCHO Rules and the defined terms in the draft 2018 ECCHO Rules. It is intended that this new rule will assist Members in determining that written amendment of BPAs/bilateral agreements may not be necessary to implement the 2018 ECCHO Rules.

(Members are still encouraged to review existing BPAs prior to July 2018 to confirm no amendments are needed).

Section XII

Section XII(D)

Adjustment Rules

(Page 78)

Replaced the time period of 45 calendar days for a bank to respond to an informational request adjustment with a cross reference to the time period specified in the Adjustment Matrix.

See also below description of proposed changes to Adjustment Matrix on page 23 of this Matrix.

There are now different time periods in the Adjustment Matrix for responding to the different types of informational request adjustments. The draft Rules cross reference the time period in the Adjustment Matrix.

In addition, proposed changes to the Adjustment Matrix, attached to the ECCHO Rules, will use the WIC adjustment reason for the RDC indemnity claim. (See discussion on page 23 of this Matrix).

Section XV

Section XV(B)

Imperfect Image Items

(Pages 92 - 93)

Made certain conforming/cross reference changes to the Rule and related Commentary.

This proposed change in Section XV(B) replaces a reference to the ECCHO warranties with a reference to the Regulation CC warranties.

Proposed change to Section XIX removes the references to the warranties in Section XIX(L) and XIX(J) and in substitution relies on the new Electronic Check warranties contained in Regulation CC, Section 229.34(a). These Regulation CC warranties apply as a matter of law to Electronic Checks/Electronic Returned Checks.

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Section XVIII

Section XVIII(F)

Exchange of Images of Canadian Items

(Page 122)

Updated exclusion of the application of Regulation CC to Images of Canadian Items.

Added statement clarifying that Reg CC does not apply to Images of Canadian Items, notwithstanding that Regulation CC now applies to Electronic Checks as a matter of law.

Previously this rule text excluded Images of Canadian Items from coverage under Reg CC by not applying Section XIX(F) to Images of Canadian Items.

In both cases, Regulation CC should not apply to Images of Canadian Items, as they are not drawn on a U.S. bank.

Also reflected the name change of Payments Canada, formerly The Canadian Payments Association.

Section XVIII(O)

Exchange of Images of Canadian Items

(Page 130)

Added reference to the “no duplication” warranty contained in Section 229.34(a)(1)(ii) of amended Regulation CC.

This change is needed to reflect that the “no duplication” warranty is being deleted from the ECCHO Rules as part of this rules update. Banks will rely exclusively on the “no duplication” warranty in amended Regulation CC

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Part 2: Proposed Rules Changes for Section XIX of the Rules


Section XIX Electronic Checks

Section XIX(A) through Section XIX(Q)

(Page 136 - 234)

Various changes to reflect new defined terms of Electronic Check, Image and Electronic Information.

Changes throughout Section XIX to reflect transition to new ECCHO defined terms: Electronic Check, Image and Electronic Information.

Section XIX(A)

Compliance with Other Rules Sections

(Page 136)

Definitional changes only. No substantive changes to this section. Updated defined terms.

Section XIX(B)

Reserved

(Page 137)

No changes. N/A

Section XIX(C)

Items Eligible for Imaging

(Page 138-141)

Added the word “paper” in Section XIX(C)(1)(a.1)

Text in Section XIX(C)(1) regarding banks’ agreement to send items with incomplete MICR line --- shortened and moved to bottom of Section XIX(C)(1).

Text formerly in Section XIX(C)(1) regarding items in carrier envelope --- moved down to new Section XIX(C)(6).

Text formerly in Section XIX(C)(2) regarding Electronic Checks with missing image --- moved down to new Section XIX(C)(7).

Shortened introduction to Section XIX(C)(3) regarding agreement for exchange of As Read MICR.

Addition of the word “paper” in Section XIX(C)(1)(a.1) more clearly links ECCHO eligibility rule to the definition of “Electronic Check” in amended Regulation CC which says that an Electronic Check is derived from a “paper check.”

Other changes to Section XIX(C) and related Commentary are intended to improve readability by (i) relocating certain text to new standalone paragraphs within Section XIX(C) and (ii) shortening some phrasing.

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Shortened introduction to Section XIX(C)(4) regarding agreement for exchange of RNA Partial MICR.

Section XIX(C)

Items Eligible for Imaging

Commentary

(Page 142)

Added new cross reference to the Commentary in Section 1 of the draft Rules that explains that ECIs are not eligible for exchange as Electronic Checks under ECCHO Rules.

Deleted Commentary that refers to outdated check truncation programs. (Example: truncation programs that involve customer code on check to indicate truncation eligibility.)

The addition of cross reference to the new Commentary in Section I (explaining that ECIs are not eligible under ECCHO Rules) does not change the current ECCHO Rules approach to ECIs. New Commentary is provided for clarity in light of the Reg CC change to define ECIs.

Deleted other Commentary not relevant to current exchange environment.

Section XIX(D)(2)

Provision of Electronic Check of Eligible Item

(Page 151)

Deleted text in Section XIX(D)(2) beginning at “Notwithstanding Section XIX(L)…..”.

The current ECCHO Rule text provides an indemnity to a paying bank in the event that the presenting bank sends the Presentment Notice file (now renamed “Electronic Information”), but the presenting bank does not follow that with the sending of the Image file. The indemnity protects the paying bank from loss that arises from the failure of the presenting bank to send both files to the paying bank.

This indemnity was viewed as important in the early days of imaging and ECP, when there was greater separation or time period between the sending of the ECP/presentment notice file and the separate image file.

Decision of Working Group: After discussion, the Reg. CC Working Group determined that this indemnity was not needed, and could be deleted from the Rules.

This is not a Regulation CC related change.

Section XIX(D)

Commentary

(Page 156-157)

(Page 156)

Revised Commentary references to ECCHO warranties in Section XIX(L) to instead reference new warranties in Regulation CC Section 229.34.

Deleted Commentary relating to the indemnity that is deleted from Section XIX(D)(2).

Revised cross reference to ECCHO Electronic Check warranties. Draft Section XIX(L) is revised to delete the warranties regarding Electronic Checks. Exchanging banks will instead rely on new warranties in amended Regulation CC Section 229.34(a).

Current Commentary discussing the indemnity for failure to send both Image and Electronic Information files is deleted to reflect deletion of that indemnity from Section XIX(D)(2).

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Section XIX(E)(1)

Indorsement of Electronic Check

(Page 158)

Deleted indorsement requirement under Section XIX(E)(1) and replaced it with reference to indorsement requirements of Regulation CC Section 229.35.

Amended Regulation CC now directly imposes indorsement requirements on banks handling Electronic Checks. ECCHO Rules will rely on amended Regulation CC for this requirement.

Removed reference to indorsing paper check. ECCHO Rules will rely on amended Regulation CC indorsement rule.

Section XIX(E)(2)

Reserved

(Page 158)

Entire section deleted. Sending Bank indorsement now addressed only in Section XIX(E)(1).

Section XIX(E)

Commentary

(Pages 159 - 161)

Revised Commentary to reference indorsement requirements under Regulation CC for Electronic Checks.

Added reference to ANSI indorsement standard.

Deleted Commentary relating to indorsement of paper check by depositary bank.

Deleted Commentary relating to retention of prior indorsements.

Conforming changes to Commentary to reflect that ECCHO Rules will rely on ANSI indorsement standard required under amended Reg CC.

Section XIX(F)

Status of Electronic Check

(Page 162)

Added new sentence to confirm that Electronic Checks under ECCHO Rules are also Electronic Checks under Regulation CC.

Added new text to reference banks’ image exchange agreements under amended Section 229.36(a) of Regulation CC.

Revision to state that ECCHO Rules are an agreement for variation of Regulation CC, and not just an “electronic presentment” agreement under Regulation CC.

Amended Regulation CC now applies to Electronic Checks as a matter of law, so it is not necessary to apply Reg CC by agreement of banks within ECCHO Rules. New text in ECCHO Rules clarifies that “Electronic Check” under ECCHO Rules is also subject to Regulation CC.

Section 229.36(a) of amended Regulation CC states that banks must have agreement to specify terms for presentment of Electronic Checks. New text in Section XIX(F) clarifies that the ECCHO Rules form part of this agreement of the banks to receive Electronic Checks.

The revision to state that ECCHO Rules are an agreement for variation of Regulation CC makes it clearer that ECCHO Rules are an agreement for variation of Regulation CC generally, and not just an agreement for electronic presentment. (The Commentary to Regulation CC Section 229.37 still includes an agreement for electronic presentment as a type of permissible variation of Reg CC by agreement of the parties.)

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Section XIX(F)

Status of Electronic Check

Commentary

(Page 163)

Addition of new Commentary that an Electronic Check is subject to Regulation CC as matter of law.

Addition of new Commentary regarding the types of required agreements for exchange of Electronic Checks and that ECCHO Rules are part of an exchange agreement required under amended Regulation CC.

New Commentary describes how Regulation CC applies as matter of law to Electronic Checks. Before change to amended Regulation CC, ECCHO Rules applied Regulation CC as a matter of agreement of exchanging banks.

New Commentary explains how the ECCHO Rules form part of agreement of exchanging banks for exchange/presentment of Electronic Checks.

Section XIX(G)

Transmission and Acknowledgement of Electronic Check

(Pages 164-170)

Addition of new descriptive paragraph headers to Sections XIX (G)(1); XIX (G)(2); XIX(G)(3); XIX(G)(4)(a); XIX(G)(4)(b); and XIX(G)(5).

Addition of new descriptive headers for paragraphs is to improve readability.


Section XIX(G)

Transmission and Acknowledgement of Electronic Check

Commentary

(Pages 171, 172 and 181)

Deleted reference to CD ROM as means of image exchange.

Deleted sentence regarding physical transportation of Electronic Image.

Deleted a repetitive paragraph relating to Sending Bank’s warranty liability when re-transmitting a file at the request of the Receiving Bank.

Deleted Commentary relates to exchange processes that are not supported in the current check image exchange environment.

Deleted a repetitive commentary regarding warranty liability for resending duplicate files.


Section XIX(H)

Presentment

Commentary

(Page 185)

Revised the current Commentary references to the ECCHO warranties in Section XIX(L) to instead reference the new warranties in amended Regulation CC Section 229.34(a).

The updated Commentary to cross reference the Electronic Check warranties in amended Regulation CC, as opposed to the warranties in Section XIX(L) of the ECCHO Rules.

Draft Section XIX(L) is revised to delete its warranties regarding Electronic Checks and instead rely on new warranties in amended Regulation CC Section 229.34(a). (See below discussion regarding changes to Section XIX(L))

Section XIX(I) No changes. N/A

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Reserved

(Page 188)Section XIX(J)

Electronic Check Return

(Page 189)


Section XIX(K)

Storage and Retrieval of Related Physical Checks and Images

Commentary

(Page 197-199)

Deleted two paragraphs in Commentary relating to informational content of bank’s request for retrieval of item.

Non-substantive deletion to Commentary.

Section XIX(L)

Sending Bank Warranties and Indemnification

(Page 202)

Deleted ECCHO Rules warranties in Section XIX(L)(2) through (7).

These ECCHO Rules warranties are provided from Sending Bank to the Receiving Bank with respect to an exchanged Electronic Check.

The deleted Sending Bank warranties from Section XIX(L)(2)-(7) are:

(2)Electronic Image accurately reflects the Related Physical Check;

(3)Presentment Notice accurately describes the Related Physical Check;

(4)Electronic Image is an Acceptable Copy of Related Physical Check;

(5)Electronic Image accurately corresponds to an item described in a Presentment Notice;

(6)Electronic Image contains all of the information required pursuant to generally

Proposed Section XIX(L) deletes the warranties regarding Electronic Checks and instead relies on new warranties for Electronic Checks in amended Regulation CC, Section 229.34(a).

Section 229.34(a) of amended Regulation CC includes three new warranties with respect to an Electronic Check exchanged between two banks. These new Regulation CC warranties by the Sending Bank to the Receiving Bank are:

(i) the electronic image accurately represents all of the information on the front and back of the original check as of the time that the original check was truncated,

(ii) the electronic information includes an accurate record of all MICR line information required for a substitute check under § 229.2(aaa) and the amount of the check, and

(iii) no duplicate payment (Check 21 Act language).

While the Regulation CC warranties for Electronic Checks are not exactly the same as the ECCHO warranties, the following describes how the two warranty sets generally correspond to each other:

Warranties regarding the Image: Reg CC warranty 229.34(a)(i) (relating to image that accurately reflects information from truncated check) corresponds to ECCHO warranties XIX(L)(2), XIX(L)(4) and XIX(L)(6).

Warranties regarding Electronic Information (Data Record): Reg CC warranty 229.34(a)(i) (relating to substitute check creation) corresponds to ECCHO warranties XIX(L)(3) and XIX(L)(5).

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applicable industry standards; and

(7)No duplicate payment by Receiving Bank.

Warranty on No Duplication: Reg CC warranty 229.34(a)(ii) corresponds to ECCHO warranty XIX(L)(7).

Because these Electronic Check warranties under amended Regulation CC apply to banks and Electronic Checks as a matter of law, the liability for breaching these warranties and the related statute of limitations will be as provided under Regulation CC. Breach of these Reg CC warranties will not be considered a breach of the ECCHO Rules and would not be subject to ECCHO Rules’ indemnity clause.

It is proposed to retain the current ECCHO Rules’ warranty in Section XIX(L)(1) in which the Sending Bank warrants to the Receiving Bank that the Sending Bank has complied with the ECCHO Rules. There is an indemnification under Section XIX(L) by the Sending Bank for breach of this ECCHO warranty.

Section XIX(L)


Commentary

(Page 204-205)

Deleted Commentary relating to ECCHO warranties in clauses (2) through (6) of Section XIX(L).

This deleted Commentary relates to those warranties in Sections of XIX(L) that are being deleted in the proposed revisions to the ECCHO Rules. See above discussion of changes to the warranty text of Section XIX(L).

Section XIX(L)


Commentary

(Page 203)

Addition of new Commentary to summarize the warranties provided under amended Regulation CC for Electronic Checks.

New Commentary provides summary of the Regulation CC warranties for Electronic Checks to explain that there are warranties for Electronic Checks imposed under applicable law.

Section XIX(L)


Commentary

(Page 206-207)

Retained Commentary for ECCHO warranty clause (7) [no duplicate payment], but revised this Commentary to reference the corresponding Regulation CC Duplicate Payment Warranty in amended Regulation CC Section 229.34(a)(ii).

The revised Commentary retains prior ECCHO Commentary discussing the ECCHO warranty regarding no duplicate payment (Section XIX(L)(7)). However, this Commentary is revised to refer to the corresponding no duplicate payment warranty under Regulation CC.

This Commentary text is being retained in the ECCHO Rules because this Commentary represents ECCHO’s view on the application of the no duplicate payment warranty in various scenarios.

Section XIX(L)


Commentary

Addition of new Commentary to explain how the image quality warranty under Section 229.34(a)(1) of amended Regulation CC relates to “information” from

New Commentary provides guidance on the application of image quality warranty under Section 229.34(a)(1), with a focus on explaining how the image of the truncated paper check should reflect “information”, and does not have to carry all watermarks and security codes from the paper check. This warranty explanation is consistent with Regulation CC

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(Page 208)the front and back of the truncated paper check.

commentary and with a recent court decision interpreting Regulation J image quality warranty.

Section XIX(L)


Commentary

(Page 204)

Deleted Commentary that explained relationship of indemnity in Section XIX(D), for delayed files, to the indemnity in Section XIX(L) for warranty breaches.

The indemnity in Section XIX(D) is being deleted in these proposed Rules changes. As a result, this Commentary is no longer needed.

Section XIX(M)

Receiving Bank Warranties and Indemnification

Commentary

(Page 212)

Deleted the phrase “Given the relative newness of imaging” from two sentences.

Modified sentence regarding example of negligence claim under Section XIX(M).

These are clean up changes to Commentary. Not Regulation CC related.

Section XIX(N)

Remotely Created Check Warranty

(Page 213)


Section XIX(O)

Forged and Counterfeit Check Warranties

(Page 219)


Section XIX(P)

Presumption of Alteration for Certain Items

(Page 231)


Section XIX(Q)

Recourse to Prior Collecting or Receiving Bank

(Page 233)


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Part 3: Proposed Rules Changes for Section XX of the Rules


Section XX Electronic Returned Checks

Section XX(A) through Section XX(K)

Electronic Returned Checks

(Page 235-291)

Replaced term “Image Return” with “Electronic Returned Check” throughout Section XX.

Used new defined terms of “Image” and “Electronic Information” to refer to the image and electronic file portions of an Electronic Returned Check.

Made various conforming modifications to address use of new defined terms.

Updated citations to Regulation CC to reflect new numbering of amended Regulation CC.

Proposed revisions throughout Section XX to reflect transition to new ECCHO defined terms of “Electronic Returned Check,” “Electronic Information” and “Image.” Rules changes align to new defined term “Electronic Returned Check” in amended Regulation CC.

Section XX(A)

Compliance with Other Rules Sections

(Page 235)


Section XX(B)

Reserved

No changes. N/A

Section XX(C)(1)

Eligibility for Electronic Returned Check

(Page 237 and 239)

Added phrase “derived from” in reference to “Electronic Returned Check.”

Added word “paper” before the phrase “check as defined under Section 229.2(k) of Regulation CC.”

Moved text regarding carrier items to new Section XX(C)(4).

Textual changes are intended to more closely align the ECCHO eligibility rule in Section XX(C)(1) with the phrasing of the defined term “Electronic Returned Check” under amended Regulation CC.

Text regarding carrier items moved to new standalone Section XX(C)(4) to improve readability.

Section XX(C)(1)(a.ii) and (b.ii)

No revision.

.

The Reg CC Working Group discussed whether the current rule in Section XX(C)(1)(a.ii) and (b.ii) – which establishes two options for the content of the MICR line information for an

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Eligibility for Electronic Returned Check- MICR Line for Returned Item

(Page 237)

Electronic Returned Check -- is still the appropriate approach.

Current Section XX(C)(1)(a.ii) and (b.ii) provide two options for a paying bank that is returning an Electronic Check that was received in the forward collection process. The paying bank can return an Electronic Returned Check with either:

(a) the same MICR line information that was in the Electronic Information of the presented Electronic Check; or

(b) the MICR line information modified by the paying bank to correct a read error or omission.

This current approach in Section XX(C)(1)(a.ii) and (b.ii) varies the current X9 standard which requires the use of option (a) above. X9.100-187 requires that the On-Us field in the Type 31 record contain the fields that were in the On-Us field from the incoming Check Detail Record (Type 25) of the presented Electronic Check.

After discussion, the Reg CC Working Group determined to maintain Section XX(C)(1) (a.ii) and (b.ii) as is without revision.

Section XX(C)(4)

Carrier Items

(Page 239)

Text regarding carrier items, formerly in Section XX(C)(1), relocated to this new section.

Moved text from above in Section XX(C)(1) to Section XX(C)(4) to improve readability.

[This is not a Regulation CC related change.]

Section XX(C)

Commentary

(Page 242)

Deleted from Commentary the example of BOFD option to receive only certain types of checks as Electronic Returned Checks, and other types of returns as paper returns.

This Commentary is an example of a variation in check image return programs that is not commonly found in current check image exchange arrangements. Most BOFDs receive all (or substantially all) checks as electronic returns.


Section XX(D)(1) Electronic Returned Checks

(Page 244)

Revised statement requiring an indorsement by the Returning Bank to refer to an indorsement in compliance with Regulation CC and applicable industry standards.

Added a new statement to vary the requirement in Section 229.31(e) of amended Regulation CC

Proposed text references the indorsement obligations for an Electronic Returned Check under amended Regulation CC requirements for indorsements.

Amended Regulation CC now directly requires a bank handling an Electronic Returned Check to indorse the item in accordance with industry standards (ANSI X9.100-187).

There is no change to current Rules requirement that the Returning Member include a return reason in the Electronic Information.

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that the return reason appear on the “front” of a returned check. Under the proposed ECCHO Rules approach, the Returning Member is only required to place the electronic return reason in the Electronic Information file.

Proposed revision adds a new statement that return reason does not have to appear on the front of the Image of the Electronic Return Check. This proposed ECCHO Rule is to clarify that Section 229.31(e) of amended Regulation CC, which states that the return reason must appear “on the front” of the check, does not apply to an Electronic Returned Check This ECCHO Rules approach is proposed because Section 229.31(e) of amended Regulation CC is unclear as to whether this “front of check” requirement applies only to paper returned checks/substitute checks or also Electronic Returned Checks.

Section XX(D)(3)

Electronic Message Returns

(Pages 244 and 251)

Deleted current Section XX(D)(3) which established the content requirements for an Electronic Message Return.

Also deleted the Commentary associated with Electronic Message Returns.

An Electronic Message Return is an option under the ECCHO Rules whereby the Returning Member sends an electronic message-only return (without any corresponding check image file) to the BOFD.

Proposed draft ECCHO Rules deletes all references to the Electronic Message Return option. Based on input from Member Banks, this Electronic Message Return option is not used any more by Member Banks.


Section XX(D)(5)

Return Routing

(Page 244)

Revised Section XX(D)(5) in two places to refer to an indorsement that is “visible” on the back of an Electronic Check, as opposed to the Rules’ current use of the phrase “printed” on the back of the Electronic Check.

This proposed change is made to improve readability of the Rule. For example, an indorsement may be created with overlay as opposed to a physical stamp. The proposed new term “visible” on the back of Electronic Check is clearer compared to the current term “printed” on the back of the Electronic Check.

This is not a Regulation CC related change.]

Section XX(D)(7)

(Page 244)

Revised Section XX(D)(7) to reference the “visible” indorsement on the back of an Image of an Electronic Returned Check. The proposed draft rule changes the current rule which references an indorsement “that is physically printed on the back of the Electronic Image.”

See discussion above in Section XX(D)(5) for reason for proposed change.


Section XX(D)(1)

Commentary

(Page 249)

Made conforming changes to the Commentary to reflect proposed changes to Section XX(D)(1) regarding reliance on X9 standard

Proposed revisions to Commentary are mostly conforming changes or additional text to Commentary to reflect the above described ECCHO Rules changes to Section XX(D)(1).

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and Regulation CC for indorsement requirements.

Added new Commentary to explain the new ECCHO Rule that states that the return reason does not have to appear on the front of the Electronic Returned Check.

Deleted Commentary stating that use of an “overlay” indorsement satisfies the indorsement requirement. Commentary now refers to the applicable X9 industry standard governing indorsements that are made applicable by Regulation CC to Electronic Returned Checks.

Removed Commentary that recommended retention of prior indorsements on an Electronic Returned Check. Revised explanation of possible liability to Returning Member that did not include prior indorsements.

The Commentary reference to “overlay” indorsements is proposed for deletion because the ECCHO Rules intend to rely on the ANSI X9.100-187 standard regarding indorsements without any expansion or variation. ANSI X9.100-187 does include a statement regarding the use of overlay indorsements.

The current Commentary statement recommending retention of prior indorsements is proposed for deletion because the statement could be viewed as inconsistent with the obligation of banks to comply with X9 standard regarding indorsements, as made applicable by amended Regulation CC. The proposed revised Commentary retains the current Commentary’s explanation of how liability arises when a Returning Member does not include prior indorsements when sending an Electronic Returned Check.

Section XX(D)(4)

Commentary

(Page 251)

Added “suspected duplicate” return reason as an example of a situation where a paying bank provides one (but not all) return reasons applicable to an Electronic Returned Check.

Deleted current Commentary example of “insufficient image quality” return reason.

The newly added text on “suspect duplicate” return reason provides a more common return reason example.


Section XX(E)

Status of Electronic Returned Check

Added new sentence to clarify that Electronic Returned Checks under ECCHO Rules are also Electronic Returned Checks

Amended Regulation CC now applies to Electronic Returned Checks as a matter of law, so it is not necessary to apply Regulation CC by agreement of banks within ECCHO Rules. New text in this Section clarifies that an “Electronic Returned Check” under ECCHO Rules is also subject to Regulation

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(Page 255) under Regulation CC.

Added new sentence to rule to reference banks’ agreement for return of Electronic Returned Checks under amended Section 229.33(b) of Regulation CC.

CC.

Section §229.33(b) of amended Regulation CC states that banks must have an agreement to specify terms for return of Electronic Returned Checks. New text in Section XX(E) clarifies that the ECCHO Rules form part of this agreement of the banks to receive return of Electronic Returned Checks.

Section XX(E)

Commentary

(Page 256)

Added new Commentary that an Electronic Returned Check is subject to Regulation CC as matter of law.

Added new Commentary that ECCHO Rules form part of an agreement of banks for electronic return of an item as required under amended Regulation CC.

New Commentary describes how Regulation CC applies as matter of law to Electronic Returned Checks.

New Commentary explains how ECCHO Rules form part of an agreement of banks for the return of an Electronic Returned Check, and that such agreements are required under amended Regulation CC.

Section XX(F)(2)

Return of Electronic Returned Checks

(Page 257)

Revised phrase that Electronic Returned Check “shall be provided on a media” to “shall be delivered in a manner” agreed to by the banks.

This reference to “media” was to support the option for return of Electronic Returned Checks using CD Roms or other non-electronic transmission methods. This is an out dated reference in current check image exchange.


Section XX(F)(3)

Return of Electronic Returned Checks – Other Media

(Page 257)

Deleted multiple references to returning Electronic Returned Check on “other media.”

This “other media” option for return of Electronic Returned Checks was an out dated option of using CD Rom to return electronic checks. This option is not used or supported by Member Banks, and it is proposed for deletion in the draft Rules.

A number of conforming changes are made to Section XX and Commentary to delete all references to “other media” and/or “CD Rom” as a means of return.


Section XX(F)(4)

Return of Electronic Returned Checks – Notification to BOFD Customers

Section XX(F)(4)deleted in full.

This Section XX(F)(4) creates two obligations for a BOFD: (i) to return a paper check to the customer as required by

Section XX(F)(4) is not needed with the adoption of amended Regulation CC.

Amended Regulation CC Section 229.33(h) now expressly applies to Electronic Returned Checks and requires a BOFD to notify its customer of a returned Electronic Returned Check.

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(Page 259) applicable law, and (ii) to include the return reason on the returned check to the customer.

Section XX(F)(5)

Return of Electronic Returned Checks – Certain Obligations on Returning Bank (Page 259)

Section XX(F)(5)deleted in full.

Current Section XX(F)(5) creates two obligations on a Returnee Member (other than BOFD) when it receives an Electronic Returned Check from another bank: (i) to return the Electronic Returned Check to BOFD; and (ii) provide notice of non-payment to BOFD.

This Section XX(F)(5) is not needed with the adoption of amended Regulation CC.

A Returnee Member (other than BOFD) is obligated to return an Electronic Returned Check expeditiously to the BOFD by amended Regulation CC.

The notice of non-payment obligation is imposed directly under Regulation CC on the Paying Bank. Paying Bank can contract with the vendor (or a Returning Member) to handle the notice obligation if it wishes to do so. ECCHO Rules do not otherwise address notice of non-payment.

Section XX(F)(6)

Return of Electronic Returned Checks – Notification to BOFD Customers

(Page 259)

Revised current Section XX(F)(6) to state that Regulation CC governs the notice that the BOFD shall provide to its customer when receiving an Electronic Returned Check.

Current Section XX(F)(6) requires the BOFD to provide an image or substitute check back to its depositing customer.

Amended Regulation CC Section 229.33(h) now expressly applies to Electronic Returned Checks and requires BOFD to notify its customer of a returned check. This draft ECCHO Rules section now refers to amended Regulation CC.

Section XX(F)

Commentary

(Pages 264, 268 and 271)

Deleted sentence discussing two different return options (Image and Message).

Deleted references to ECCHO indemnity under Section XX(J) relating to accurate image.

Deleted references to use of CD Rom as return method.

Deleted Commentary that related to the deleted rules contained in Section XX(F)(5) and XX(F)(6).

These proposed changes to Commentary are conforming changes to address changes to Section XX(F) discussed above and to address the draft ECCHO Rules’ reliance on amended Regulation CC warranties in substitution of the current ECCHO Rules warranties.

Section XX(F)(7)(a) and Deleted Commentary which The Commentary in Sections XX(F)(7(a) and 7(b) is

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(7)(b)

Commentary

(Page 272 - 274)

discussed Section XX(F)(7(a) and 7(b). These two rules relate to the process for one bank to request another bank to re-send a file of Electronic Returned Checks.

Added a new sentence into Section XX(F)(7) Commentary to refer the reader to the similar Commentary in Section XIX(G)(4)(a) and 4(b), which relates to requesting a re-send of the image file in the forward exchange process.

substantially similar to the Commentary to Sections XIX(G)(4)(a) and 4(b) which applies to banks requesting a re-send of files in the forward exchange. This cross reference allows the shortening of the Commentary to Section XX(F).


Section XX(G)

Electronic Message Return In Lieu Of Return of Related Physical Check.

(Page 276)

Deleted Section XX(G).

Current Section XX(G) sets forth requirements for Returning Member that is using an Electronic Message Return option.

An Electronic Message Return is an option under current Section XX(G) whereby the Returning Member sends an electronic message-only return (without any corresponding check image file) to the BOFD.

Proposed draft ECCHO Rules deletes all references to the Electronic Message Return option. Based on input from Member Banks, this electronic message return option is not used any more by Member Banks.


Section XX(G)

Electronic Message Return In Lieu Of Return of Related Physical Check.

Commentary

(Page 277-279)

Deleted Commentary to Section XX(G).

See above discussion of Section XX(G) deletion.

Section XX(H)

Reserved

No changes. N/A

Section XX(I)

Resending of an Item

(Page 281)

Updated defined terms to new ECCHO defined terms.

Added “Electronic Check” as one of the types of presentments that is not allowed after 3 total

Conforming changes to reflect new defined terms under ECCHO Rules.

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presentments.

Section XX(J)

Returning Member Warranties and Indemnification

(Page 283)

Deleted current ECCHO warranties in Section XX(J)(2) through (4).

These ECCHO Rules warranties are provided from the Returning Member to the Returnee Member with respect to a returned Electronic Returned Check.

Proposed Section XX(J) deletes the warranties regarding Electronic Returned Checks and instead relies on new warranties for Electronic Returned Checks in amended Regulation CC Section 229.34(a).

See discussion above in the Matrix relating to revisions to Section XIX(L) and deletion of similar ECCHO warranties for the forward exchange of Electronic Checks.

Section XX(J)

Commentary

(Page 284)

Added new Commentary to summarize the warranties provided under amended Regulation CC for Electronic Returned Checks.

Deleted commentary relating to ECCHO warranties in clauses (2) through (4).

New Commentary provides summary of the Regulation CC warranties for Electronic Returned Checks, and explains that these warranties are imposed under applicable law. This is similar to text in new Commentary in Section XIX(L).

Section XX(K)(2)

Returnee Member Warranties and Indemnification

(Page 287)

Deleted Section XX(K)(2).

Current Section XX(K)(2) provides a warranty from the Returnee Member (which is not the BOFD) to the Returning Member that: (i) the Returnee Member will return Electronic Returned Check to BOFD in compliance with Regulation CC timeframe; and (ii) Returnee Member will provide notice of non-payment to BOFD.

The proposed deletion of the warranty relates to Section XX(F)(5), which is also proposed for deletion. (See above).

Current Section XX(K)(2) is not needed with the adoption of amended Regulation CC. Under amended Regulation CC, a Returnee Member (which is not the BOFD) that receives the Electronic Returned Check from a Returning Member (a paying bank) is obligated to return an Electronic Returned Check expeditiously.

Also, the notice of non-payment obligation is imposed directly under Regulation CC on the Paying Bank. Paying Bank can contract with the vendor (or a Returning Member) to handle the notice obligation, if it wishes to do so. ECCHO Rules do not otherwise address notice of non-payment.

Section XX(K)(2)

Commentary

(Page 288)

Deleted Commentary relating to Section XX(K)(2)

Conforming change to address above rule change.

Section XX(L)

Recourse to Returning Member


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(Page 291)Part 4: Proposed Rules Changes for Rules Exhibits

Exhibits

Exhibit I

Membership Agreements

(Begins on exhibit page 1)

No change. N/A

Exhibit II

Adjustment Matrix


Addition of new RDC Indemnity Claim Adjustment Reason (as a type of WIC adjustment).

Addition of new sample RDC Indemnity Claim Letter.

ECCHO Adjustment Matrix will support RDC indemnity claims between Paper Deposit Bank and RDC Bank.

Sample RDC indemnity claim letter can be used both as attachment to interbank adjustment system claim or as a standalone manual adjustment claim.

Reg CC Working Group determined not to include at this time a new adjustment reason for ECI indemnity claims. Working Group will wait to see if volume of claims in future would require an ECI indemnity adjustment reason.

Exhibit III

Other Sample Agreements


Deleted sample agreement for banks to delay presentment.

This sample agreement was used in the context of an indemnity under Section XIX(D) that is being proposed for deletion. Because of the Section XIX(D) proposed change to delete the indemnity, this sample agreement is not needed.


Exhibit IV

Sample Customer Agreements


Deleted all sample customer agreements.

ECCHO Rules contain limited sample customer agreement text for certain image or substitute check scenarios.

These samples were optional text for consideration by banks when drafting customer agreements. Given the time that has passed since the implementation of Check 21 and full image environment, there is less of a need for sample agreement text.


Exhibit V

Licensed Entities


No change. N/A

Exhibit VI

Electronic Image Quality

This exhibit discusses image quality standards.

The content of the Exhibit remains substantially the same. However, as a result of the proposed changes to ECCHO Rules to rely exclusively on amended Regulation CC

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Added in a discussion of the definition of the term “usability” which was previously in the ECCHO Rules definition section.

warranties regarding image quality, this Exhibit is no longer referenced within the ECCHO Rules. This exhibit is now provided as Exhibit to Rules for informational purposes only.

Exhibit VII

Exchange of Image of Canadian Item


Definitional changes only. No substantive changes to this section.

Updated defined terms.

Exhibit VIII

Exhibits Related to Rules in Section XIX(N) and XIX(O)



Updated defined terms.

Exhibit IX

Compensation Rules



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