cuna regtractraining.cuna.org/self_study/regtrac/member_regtrac/download/m1_fm.pdf© 2018 cuna...

© 2018 CUNA DEPOSIT ACCOUNT REGULATIONS i

DEPOSIT ACCOUNT REGULATIONS

CUNAREGTRAC

© 2018 CUNA DEPOSIT ACCOUNT REGULATIONS ii

TABLE OF CONTENTS

Legal Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Section 1 — Truth In Savings/NCUA Part 707 . . . . . . . . . . . . . . 1-1

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2

Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2

Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2

Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2

NCUA Staff Commentary . . . . . . . . . . . . . . . . . . . . . . . . . 1-2

Credit unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2

Covered accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2

Accounts not covered by TISA . . . . . . . . . . . . . . . . . . . . . . . 1-3

Members and potential members . . . . . . . . . . . . . . . . . . . . 1-3

Rules Affecting Credit Union Accounts . . . . . . . . . . . . . . . . . . . . . 1-4

The nature of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4

Interest-bearing accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4

Rules governing account terminology . . . . . . . . . . . . . . . . . 1-4

Account Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-7

Oral disclosures to rate inquiries . . . . . . . . . . . . . . . . . . . . 1-7

Account-opening disclosures . . . . . . . . . . . . . . . . . . . . . . . 1-8

Account opening . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-9

Upon request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-9

Content of TISA account disclosures . . . . . . . . . . . . . . . . . 1-10

Periodic Statement Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . 1-13

General rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-13

Content of periodic statement disclosures . . . . . . . . . . . . . 1-13

Special rules for noncalendar month crediting . . . . . . . . . . 1-15

Overdraft Privilege Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-15

Account-opening disclosures . . . . . . . . . . . . . . . . . . . . . . . 1-16

Periodic statement disclosures . . . . . . . . . . . . . . . . . . . . . 1-16

© 2018 CUNA DEPOSIT ACCOUNT REGULATIONS iii

Advertising disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-16

Prohibiting misleading advertising . . . . . . . . . . . . . . . . . . . 1-17

Disclosure of account balances . . . . . . . . . . . . . . . . . . . . . 1-18

Disclosures upon Maturity and Changes in Terms . . . . . . . . . . . . . 1-18

Renewal notices for rollover term share accounts . . . . . . . . 1-18

Maturity notices for nonrollover term share accounts . . . . . . 1-19

Change-in-terms notice . . . . . . . . . . . . . . . . . . . . . . . . . 1-19

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-20

Scope of the advertising rules . . . . . . . . . . . . . . . . . . . . . 1-20

Prohibition on misleading or inaccurate advertising . . . . . . 1-20

Disclosure requirements . . . . . . . . . . . . . . . . . . . . . . . . . 1-21

Representative example . . . . . . . . . . . . . . . . . . . . . . . . . . 1-22

APY disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-22

Bonus disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-23

Credit union newsletters, lobby signs, and special media . . 1-24

Electronic Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-24

State Law, Model Clauses, Enforcement . . . . . . . . . . . . . . . . . . . 1-25

Pre-emption of state law . . . . . . . . . . . . . . . . . . . . . . . . . 1-25

Model clauses and sample forms . . . . . . . . . . . . . . . . . . . 1-25

Administrative enforcement . . . . . . . . . . . . . . . . . . . . . . 1-25

Record retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-25

Appendix 1-A — Truth In Savings Disclosure for Savings and Checking Accounts . . . . . . . . . . . . . 1-27

Appendix 1-B — Truth In Savings Disclosure for Term Share/Certificate Accounts . . . . . . . . . . . . 1-30

Appendix 1-C — Account Renewal Notice . . . . . . . . . . . . . . . . . . 1-32

Appendix 1-D— Account Maturity Notice . . . . . . . . . . . . . . . . . . 1-34

Quiz/Study Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-35

Answer Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-39

Section 2 — Regulation D Reserve Requirements of Depository Institutions . . . . . . . . . 2-1

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-2

Monetary Reserve Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 2-2

© 2018 CUNA DEPOSIT ACCOUNT REGULATIONS iv

Interest on Reserve Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3

Filing Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3

Computation and Maintenance Periods . . . . . . . . . . . . . . . . . . . . . 2-4

Weekly reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-4

Quarterly reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-4

Calculating Reservable Liabilities and Required Reserves . . . . . . . . 2-5

Establishing a Reserve Account . . . . . . . . . . . . . . . . . . . . . . . . . . 2-6

Characteristics of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-6

Transaction accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-6

Savings deposits and money market deposit accounts . . . . . 2-7

Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-8

Appendix 2-A — FR 2900 Report of Transaction Accounts, Other Deposits, and Vault Cash . . . . . . . . . . . . . 2-10

Appendix 2-B — FR 2910a Annual Report of Total Deposits and Reservable Liabilities . . . . . . . . . . . . . . . . . 2-13

Quiz/Study Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-15

Answer Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-17

Section 3 — Regulation E: Electronic Funds Transfer . . . . . . . . . . 3-1

Purpose, Scope, and Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . 3-2

Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-2

Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-2

Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-3

General Disclosure Requirements . . . . . . . . . . . . . . . . . . . . 3-5

Disclosure of Initial Terms and Conditions . . . . . . . . . . . . . . . . . . . 3-5

Initial disclosure delivery . . . . . . . . . . . . . . . . . . . . . . . . . 3-5

Content of initial disclosures . . . . . . . . . . . . . . . . . . . . . . . 3-5

Subsequent EFT Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . 3-8

Change in terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-8

Annual error notification . . . . . . . . . . . . . . . . . . . . . . . . . . 3-8

Documentation of transfers . . . . . . . . . . . . . . . . . . . . . . . . 3-8

Disclosures at ATMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-9

© 2018 CUNA DEPOSIT ACCOUNT REGULATIONS v

Consumer Authorization for Electronic Check Conversions . . . . . . . . . 3-9

Model clauses for authorizing one-time EFT using information from a check . . . . . . . . . . . . . . . . . . . . . . . . . 3-10

Preauthorized Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-10

Transfers to a member’s account . . . . . . . . . . . . . . . . . . . 3-10

Transfers from a member’s account . . . . . . . . . . . . . . . . . 3-11

Error-Resolution Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-11

Error notification by member . . . . . . . . . . . . . . . . . . . . . . 3-12

Error investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-12

Extent of the investigation . . . . . . . . . . . . . . . . . . . . . . . . . 3-13

Notification of resolution to the member . . . . . . . . . . . . . . 3-13

Member Liability for Unauthorized Transfers . . . . . . . . . . . . . . . . 3-14

Preconditions to asserting liability . . . . . . . . . . . . . . . . . . 3-15

Liability after loss or theft . . . . . . . . . . . . . . . . . . . . . . . . . 3-15

Unauthorized use reflected on periodic statement . . . . . . . 3-16

Different rules for Visa and MasterCard debit cards . . . . . . 3-16

Payroll cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-17

Periodic statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-17

Initial disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-17

Model clauses for financial institutions offering payroll card accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-18

Liability limitations & error reporting . . . . . . . . . . . . . . . . . 3-19

Electronic Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-19

Opt-in notice for ATM and one time debit card overdrafts . . . . . . . . . 3-20

Four step opt-in requirement . . . . . . . . . . . . . . . . . . . . . . 3-20

Affirmative consent and revocation . . . . . . . . . . . . . . . . . 3-21

Opt-in notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-21

Exception to the notice and opt-in requirements . . . . . . . . 3-22

Cannot condition opt-in or vary account terms . . . . . . . . . . 3-22

Gift cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-22

Restrictions on dormancy, inactivity, or service fees . . . . . . . 3-23

Special Credit Union Rules and Concerns . . . . . . . . . . . . . . . . . . 3-24

© 2018 CUNA DEPOSIT ACCOUNT REGULATIONS vi

Issuance of access devices . . . . . . . . . . . . . . . . . . . . . . . 3-24

Compulsory use per Regulation E §205 .10(e) . . . . . . . . . . 3-24

Waiver of rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-25


State law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-25

Remittance transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-25

Appendix 3-A — EFT Agreement and Disclosure . . . . . . . . . . . . . . 3-32

Appendix 3-B — Model Form for Initial and Annual Error-Resolution Notice per Regulation E §§205 .7(b)(10) and 205 .8(b) . . . . . . . . . . . . . . . . 3-41

Appendix 3-C — Model Form for Error-Resolution on Periodic Statements per Regulation E §205 .8(b) . . 3-42

Appendix 3-D — Automatic Transfer Authorization . . . . . . . . . . . . 3-43

Quiz/Study Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-44

Answer Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-49

Section 4 — Regulation CC: Availability of Funds and Collection of Checks . . . . . . . . . . . . . . . . . . . . 4-1

Funds Availability Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 4-2

Next-day availability requirements . . . . . . . . . . . . . . . . . . . 4-2

Overview of check-availability schedule rules . . . . . . . . . . . 4-6

Exceptions to availability schedules . . . . . . . . . . . . . . . . . . 4-8

General rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-13

Deposits available at the start of a business day . . . . . . . . . 4-14

Payment of interest/dividends . . . . . . . . . . . . . . . . . . . . . 4-14

Disclosure and Notice Requirements . . . . . . . . . . . . . . . . . . . . . . 4-14

Disclosure standards . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-15

Initial disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-16

Subsequent disclosures . . . . . . . . . . . . . . . . . . . . . . . . . 4-17

Notice of case-by-case holds . . . . . . . . . . . . . . . . . . . . . . 4-18

Safeguard exception hold notice . . . . . . . . . . . . . . . . . . . 4-18

Notice on deposit slips . . . . . . . . . . . . . . . . . . . . . . . . . . 4-20

Notice at locations where credit union employees

© 2018 CUNA DEPOSIT ACCOUNT REGULATIONS vii

accept deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-20

Notice at ATMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-20

The Collection and Return Process . . . . . . . . . . . . . . . . . . . . . . . 4-21

Overview of the forward collection and return system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-21

Expeditious return of check — paying and returning credit union’s responsibilities . . . . . . . . . . . . . . . 4-22

Depositary credit unions — responsibility for returned checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-26

Notice of nonpayment . . . . . . . . . . . . . . . . . . . . . . . . . . 4-28

Warranties by the paying credit union and the returning credit union . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-29

Endorsement Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-30

Applicability of endorsement standards . . . . . . . . . . . . . . 4-31

Depositary credit union endorsement . . . . . . . . . . . . . . . . . 4-31

Collecting credit union endorsement . . . . . . . . . . . . . . . . 4-32

Returning credit union endorsement . . . . . . . . . . . . . . . . 4-33

Carbon bands and other preprinted information . . . . . . . . . 4-39

Liabilities and Defenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-33

Liability for return-check delays . . . . . . . . . . . . . . . . . . . . 4-33

Liability for handling checks . . . . . . . . . . . . . . . . . . . . . . 4-34

State Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-34

Civil Liabilities and Defenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-35

Civil liability to individuals . . . . . . . . . . . . . . . . . . . . . . . 4-35

Civil liability for class actions . . . . . . . . . . . . . . . . . . . . . 4-35

Bona fide errors defense . . . . . . . . . . . . . . . . . . . . . . . . . 4-36

Limitation on actions . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-36

Reasonable reliance defense . . . . . . . . . . . . . . . . . . . . . . 4-36

Return check liability . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-36

Administrative enforcement . . . . . . . . . . . . . . . . . . . . . . 4-38


Check 21 amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-38

Expedited recredit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-40

Consumer awareness disclosures . . . . . . . . . . . . . . . . . . . . 4-40

© 2018 CUNA DEPOSIT ACCOUNT REGULATIONS viii

Remotely created checks . . . . . . . . . . . . . . . . . . . . . . . . . 4-41

Appendix 4-A — Deposit Hold Notice . . . . . . . . . . . . . . . . . . . . . 4-42

Appendix 4-B — Funds Availability Policy and Disclosure . . . . . . . . 4-43

Appendix 4-C — Substitute Check . . . . . . . . . . . . . . . . . . . . . . . . 4-45

Appendix 4-D — Check 21 Notices and Disclosures . . . . . . . . . . . . 4-47

Quiz/Study Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-50

Answer Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-53

Section 5 — Uniform Commercial Code Articles 3 and 4 . . . . . . . . 5-1

The Uniform Commercial Code . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-2

General Background of UCC Articles 3 and 4 . . . . . . . . . . . . . . . . . 5-3

UCC Article 3: Negotiable Instruments . . . . . . . . . . . . . . . . . . . . . 5-5

Part 1 — General provisions . . . . . . . . . . . . . . . . . . . . . . . 5-5

Part 2 — Negotiation, transfer, and endorsement . . . . . . . . 5-9

Part 3 — Enforcement of instruments . . . . . . . . . . . . . . . 5-10

Part 4 — Liability of parties . . . . . . . . . . . . . . . . . . . . . . 5-18

Part 5 — Dishonor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-21

UCC Article 4: Bank Deposits and Collections . . . . . . . . . . . . . . . 5-22

Part 1 — General provisions and definitions . . . . . . . . . . . 5-23

Part 2 — Collection of items: depositary and collection banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-25

Part 3 — Collection of items: payor banks . . . . . . . . . . . . . 5-30

Part 4 — Relationship between payor bank and its customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-30

Considerations Regarding Policies and Procedures . . . . . . . . . . . . 5-34

Record Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-35

Products and Services Affected by UCC Articles 3 and 4 . . . . . . . . 5-35

Quiz/Study Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-36

Answer Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-39

Section 6 — Uniform Commercial Code Article 4A and Regulation J . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1

From Paper Instruments to Bits and Bytes . . . . . . . . . . . . . . . . . . . 6-2

© 2018 CUNA DEPOSIT ACCOUNT REGULATIONS ix

What is a “Funds Transfer” Under UCC 4A and Reg J? . . . . . . . . . . 6-3

Funds Transfers Not Covered by Reg J and/or UCC 4A . . . . . . . . . . . 6-5

The Credit Union as Receiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-6

Security procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-6

Notice of rejection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-8

Credit Unions as Beneficiary’s Banks . . . . . . . . . . . . . . . . . . . . . . 6-8

Protecting the Rights of the Credit Union in Funds Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-9

Cutoff time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-9

Choice of law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-10

Member’s liability for beneficiary number error or routing number error . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-10

Choice of accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-11

Notification of credits . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-11

Provisional payment — ACH . . . . . . . . . . . . . . . . . . . . . . 6-12

Wire Transfer Policy Considerations . . . . . . . . . . . . . . . . . . . . . . 6-12

UCC 4A and Reg J — Issues for Follow Up . . . . . . . . . . . . . . . . . . 6-14

Remotely Created Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-14

Record Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-15

Appendix 6-A — Sample Wire Transfer Request . . . . . . . . . . . . . . 6-16

Appendix 6-B — Sample Wire Transfer Agreement . . . . . . . . . . . . 6-17

Appendix 6-C — Sample Wire Transfer Notice . . . . . . . . . . . . . . . 6-21

Quiz/Study Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-23

Answer Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-25

Section 7 — Regulation II: Debit Card Interchange Fees and Routing . . . . . . . . . . . . . . . . . . . . . . . . . 7-1

Interchange Fee Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-2

Small Issuer Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-2

Network Exclusivity and Routing Requirements . . . . . . . . . . . . . . . . 7-3

Network Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-3

Routing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-3

© 2018 CUNA DEPOSIT ACCOUNT REGULATIONS x

Legal Review

The RegTraC books are designed to provide general information regard-ing regulations affecting credit unions . They are not intended to substitute for legal advice based upon specific facts in any individual case, and cred-it unions with regulatory concerns are advised to consult with attorneys or specialists to obtain advice directed to their specific circumstances .

With respect to the content of the RegTraC books, neither Credit Union National Association (CUNA) nor its employees — nor any of its affiliates or their respective employees — make any express or implied warranty or assume any legal liability or responsibility for the accuracy, completeness, merchantability, fitness for a particular purpose or usefulness of any information . Neither do these books constitute an endorsement, recommendation or warranty of any product, service or pro-vider mentioned herein . The views and opinions of the authors do not nec-essarily reflect those of CUNA . The books shall not be used for advertising or product endorsement purposes . To the maximum extent permitted by law, CUNA shall not be liable for any damages whatsoever arising out of the use, or inability to use, the books .

Material contained in the books is protected by copyright law . No part of any copyrighted materials may be reproduced or distributed without the prior written permission of the owner .

If you have further questions, please contact CUNA at 800-356-9655, ext . 4249, or e-mail [email protected].

Acknowledgments

In developing this certification program, comments and ideas were solicited from an extensive number of experienced league and credit union people throughout the U .S . This network of credit union-oriented reviewers provided a wealth of information used in the production of this book . True to credit union philosophy, the reviewers volunteered their efforts . Their work was time-consuming and tremendously helpful . The authors and publisher of this book wish to acknowledge their contributions with great appreciation .

Contributors include:

• Andrea Stritzke, PolicyWorks

• Jeff Andersen, PolicyWorks

• Jennifer Anderson-Kapke, PolicyWorks

• Jeremy Smith, PolicyWorks

mailto:RegTraC%40cuna.com?subject=

© 2018 CUNA DEPOSIT ACCOUNT REGULATIONS 1-1

SECTION 1 – TRUTH IN SAVINGS/NCUA PART 707


Overview

Authority

The Truth In Savings Act of 1991 (TISA) was enacted in December 1991. The statute directed the Federal Reserve Board (FRB) to implement regulations for all depository institutions except credit unions. It also directed the National Credit Union Administration (NCUA) to issue regulations for state-chartered and federally chartered credit unions “substantially similar” to the FRB Regulation DD (Reg. DD), taking into account the unique nature of credit unions and the limitations under which they may pay dividends on member accounts.

Purpose

TISA is basically a disclosure law, the purpose of which is to enable consum-ers (credit union members and potential members) to make meaningful compari-sons of deposit accounts among deposi-tory institutions.

Truth In Savings imposes special disclosure requirements at five differ-ent points in the life cycle of a deposit account: 1) preaccount opening, 2) account opening, 3) periodic state-ments, 4) changes in account terms and account maturity, and 5) advertising.

Coverage

Credit unions are required to disclose to members fees, dividend and inter-est rates, and other terms in connection with an account before an account is opened, upon request, on periodic state-ments, and upon subsequent events.

TISA also establishes rules for pay-ment of dividends or interest and adver-tising rules for deposit accounts.

NCUA Staff Commentary

On November 8, 1994, NCUA issued its Official Staff Interpretation (Commentary) to the Truth In Savings Rule (Part 707) incorporating much of the Supplementary information issued with Part 707 and addressing additional compliance questions.

Good-faith compliance with NCUA’s commentary affords credit unions pro-tections from civil liability penalties.

Credit unions

NCUA’s regulation applies to all federal and state-chartered credit unions whether federally or privately insured, except corporate credit unions. (Regulation DD does not directly apply to credit unions.)

Covered accounts

The following are covered accounts:

• Traditional accounts such as: share, share draft, checking, and time deposits.

Section 1 – Truth In Savings/NCUA Part 707


SECTION 1 – TRUTH-IN-SAVINGS / NCUA PART 707

• Dividend-bearing and nondividend-bearing accounts.

• Insured and uninsured accounts (for example, a jumbo certificate account in excess of $100,000).

• IRA accounts.

• Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTTMA) accounts.

• Accounts held by deposit brokers (only for purposes of advertising rules).

Accounts not covered by TISA

The rule does not cover the following accounts:

• Accounts held by an unincorporated nonbusiness association of natural per-sons (club or organization accounts). Originally, NCUA had included club accounts opened after the effective date as accounts covered by Truth In Savings.

• In the Riegle Community Development and Regulatory Improvement Act of 1994, Congress amended TISA to exempt unincorporated association accounts.

Note: While club accounts are not covered, credit unions may find it easier to treat these accounts as cov-ered accounts rather than maintain-ing two different procedures, one for club accounts and another for all other accounts.

• Sole proprietorship accounts because such accounts are held for a business purpose.

• Accounts of natural persons who, in their professional capacity, hold the account for another (for example, attorney-client trust accounts and trust accounts opened by a trustee as a result of a formal written trust agree-ment).

• Nondeposit type accounts, such as mortgage escrow accounts, construc-tion loan accounts, discount brokerage accounts, and overdraft line of credit accounts.

Members and potential members

NCUA defines account coverage for members by a consumer vs. busi-ness purpose account distinction. The term member under the final rule includes the following persons holding an account primarily for personal, fam-ily, or household (consumer) purposes: (1) natural person (individual) members who hold a consumer purpose account, and (2) a natural person nonmember (individual joint owner). Members hold-ing an account for a purpose other than primarily for personal, family, or house-hold (consumer) purposes and members holding an account for another in a pro-fessional capacity would not be covered.

For example, members holding accounts for corporations, partnerships and, sole proprietorships or other busi-ness purposes would not be covered. Similarly, attorney-client trust accounts and certain trust, estate, and court-ordered accounts would not be covered.

The term potential member is impor-tant as the credit union must give cer-tain disclosures to “potential members.” The term includes a natural person with-



in the credit union’s field of membership or one eligible to become a member.

Note: Similar to the coverage issues for “accounts,” credit unions may also consider treating all members as cov-ered members including members with business accounts. Again, compliance is easier with one set of account proce-dures.

Rules Affecting Credit Union Accounts

The nature of dividends

One of the key differences between the Truth In Savings rules for banks and credit unions is the unique limitation on credit unions’ payment of dividends.

Credit union dividends comprise the portion of available current and undivid-ed earnings of the credit union, which, by declaration of the board of directors, is set aside for distribution to members after required transfers to reserves.

Dividends cannot be guaranteed and members have no right to a dividend, even on share certificates, unless avail-able earnings exist and dividends are, in fact, declared for such accounts.

The term dividends means any declared or prospective earnings on a member’s shares in a credit union to be paid to a member or a member’s account. The term excludes bonuses, extraordinary dividends, and similar incentives. The dividend period is the time period, set by the credit union board, at the end of which dividends are earned and credited. The dividend peri-od may be different for different types of accounts (for example, weekly, monthly,

and quarterly). For some certificate accounts, the dividend period may be at maturity. Credit union dividends are not guaranteed.

Note: In the commentary, NCUA makes the distinction between divi-dend- and interest-bearing accounts by emphasizing that federal credit unions are only permitted to offer dividend-bearing accounts and only certain state-chartered credit unions may offer interest-bearing accounts.

Interest-bearing accounts

In some states state-chartered credit unions are permitted to offer interest-bearing accounts pursuant to state law; thus, the rule includes rules for pay-ment of interest. (Check with your state League to determine whether your state allows state-chartered credit unions to offer interest-bearing accounts.) The term interest means any payment to a member or to a member’s account for use of funds in the account of a state-chartered credit union under state law. For purposes of the rule, the term “inter-est” is generally substituted for the term “dividends.” Like the term “dividends,” “interest” excludes bonuses and similar incentives.

Rules governing account terminology

TISA requires the use of certain basic account terminology to achieve meaningful and uniform understand-ing of accounts. In addition to the TISA required terms, NCUA has imposed additional account terminology require-ments.



Required TISA terms — dividend rate, APY, and APYE

TISA requires the disclosure of an accurate reflection of the effective rate of interest. This effective rate of inter-est is known as the “annual percentage yield” (APY) which is designed to permit a true comparison of deposit products among institutions. Credit unions are required to disclose earnings through the use of the terms: “dividend rate,” “annual percentage yield,” and “annual percentage yield earned.” The APY dis-closure is one of the most important fea-tures of TISA and is required in the oral rate disclosures, account disclosures, renewal notices, and advertising.

• The term dividend rate means the declared or prospective annual divi-dend rate paid on an account without regard to compounding. “Prospective rates” are rates set in good faith in advance of the close of a dividend period, which may be altered if suf-ficient funds are not available or in the event of a superseding event such as a strike, plant closure, significant fluctuation in market rates and/or sig-nificant change in financial structure, natural disaster, or emergency that alters the assumptions under which the “prospective rates” were made. The dividend rate used for account disclosures and advertising is to be rounded to the nearest basis point (.01 percent) and disclosed to two decimal places (for example, 4.55%). Bonuses (and similar incentives, such as the waiver or reduction of fees and items worth less than $10 in a calen-dar year) are excluded from dividends and in calculating the dividend rate.

• The term Annual Percentage Yield (APY) means the percentage rate reflecting the total amount of divi-dends paid on an account based on the dividend rate and the frequency of compounding for a 365-day period for share and share draft accounts or for the term of the account for term share accounts. The APY assumes the princi-pal amount remains in the account for 365 days or the term of the account. Appendix A to the NCUA Rule sets forth detailed computation specifica-tions.

• The term Annual Percentage Yield Earned (APYE) reflects the total amount of dividends actually earned for the dividend or statement period as a percent of the actual average daily balance in the account. The APYE is affected by additions and withdrawals during the period and is required for periodic statements only. The APYE is calculated according to the formula provided in Appendix A to the NCUA Rule.

Permissible account terms

Credit unions are permitted to use the following terms to describe accounts:

• “Checking Account” for share draft accounts

• “Money Market Account” for money market share accounts

• “Savings Account” for regular share or share accounts

• “Share Certificate,” “Certificate Account,” or “Certificate” for share certificate accounts or dividend-bear-ing term share accounts

http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&SID=a0bd00406c140b715a5bb646efaf2d4b&rgn=div5&view=text&node=12:7.0.2.3.8&idno=12#12:7.0.2.3.8.0.1.12.11



Prohibited account terms

Federal credit unions are prohibited from describing a Certificate Account with terms such as “Certificate of Deposit,” “CD,” “time account,” and “time deposit.” Similarly, state- chartered credit unions may not use such terms to describe dividend-bearing certificate accounts. However, state-chartered credit unions that can offer interest-bearing accounts can use such terms for interest-bearing certifi-cate accounts.

Rules affecting account earnings

The TISA rule contains five categories of substantive provisions governing the computation and disclosure of account earnings: (1) balance computation rules, (2) dividend nonpayment rules, (3) divi-dend accrual rules, (4) compounding and crediting; and (5) minimum balance rules.

1. Balance computation rules. As a gen-eral rule, credit unions must calculate dividends/interest “on the full amount of principal in the account for each day of the stated calculation period.” NCUA’s rule prohibits payment of dividends based on a “rollback” or “low balance” accounts method, increments of par value, ending balance, or investable balance method. To calculate interest/dividends credit unions must use either the daily balance or the average daily balance method. Under the daily bal-ance method the credit union applies a daily periodic rate to the exact daily bal-ance in the account for each day. Since dividends must be calculated on the full amount of principal in the account for each day, the ending balance rather

than a “low” daily balance would be used. Under the average daily balance method the credit union adds the full amount of principal in the account each day of the period, divides that figure by the number of days in the period, and applies a periodic rate to the result.

2. Dividend nonpayment rules. There are certain instances when credit unions are not required to pay dividends. They would not be required to pay dividends on term share accounts (term share/share certificates) during the grace period of a rollover term share account, after maturity of a nonrollover term share account, or for the time period during which checks are returned unpaid. Credit unions also have the option of not paying accrued dividends if a member closes an account before those dividends are paid. However, this policy must be in the account disclosures. Be sure to check for any state law concerning accrued dividends and closed accounts as well as any bylaws outlining when an account is considered closed.

Dividends must continue to be paid on dormant or inactive accounts. If a credit union accrues dividends on funds represented by a deposited check that is later dishonored, the credit union need not pay dividends for the time period the check was outstanding. Dividends must be paid on accounts of members who have caused the credit union a loss. To read the NCUA letter addressing these issues, go to www.ncua.gov/Legal/OpinionLetters/OL1999-0448.pdf

3. Dividend accrual rules. Credit unions must begin to accrue dividends on accounts no later than the day the

www.ncua.gov/Legal/OpinionLetters/OL1999-0448.pdf

www.ncua.gov/Legal/OpinionLetters/OL1999-0448.pdf



credit union receives provisional credit for the deposit, and must continue to accrue on those funds until the day they are withdrawn from the account. (For example, if a share draft is debited from the account on Tuesday, the credit union must accrue dividends on those funds on deposit through Monday.) Credit unions may not accrue or pay dividends on par-value increments. (For example, prior to the new regulation, if par value was $5 and an account had a $24 balance, divi-dends could be paid on $20 rather than the entire $24 balance.)

4. Compounding and crediting. NCUA’s rule does not mandate a particular mini-mum or maximum frequency with which dividends are compounded or credited (for example, daily, monthly, quarterly, annually, continuously, etc.). However, the compounding frequency must be dis-closed in the account disclosures. Credit unions are not required to pay dividends that have accrued but that have not yet been credited if the account is closed between crediting dates.

5. Minimum balance rules. Credit unions are permitted to set minimum balance requirements that must be met for the member to earn dividends or to earn a specified rate on an account. (For exam-ple, the credit union may choose to pay a 4.00% dividend rate on an account only for those days the minimum bal-ance of $500 is met.) Credit unions may not refuse to pay dividends on a portion of a balance once a member has met a required minimum balance. (For exam-ple, if the minimum balance requirement for dividends is $250 and the member maintains a $500 balance, the credit union must pay dividends on the entire $500.)

For credit unions using a daily bal-ance method, an account balance need only meet the minimum requirement for the particular day to earn dividends for that day. (For example, a credit union may not provide that a member will earn a 5.00% rate only if a minimum bal-ance of $500 is maintained each day in the period.) For credit unions using an average daily balance, the average daily account balance needs to meet the mini-mum balance requirement for the period to earn dividends for the period. Credit unions must use the same method to determine a minimum balance required to earn dividends as they use to deter-mine the balance upon which dividends will accrue and be paid. (For example, a credit union calculating dividends on a daily balance method must use the daily balance method to calculate the minimum balance requirement, if any, to earn dividends.)

Account Disclosures

Oral disclosures to rate inquiries

As a further promotion of compara-tive shopping, credit unions must give standardized responses to oral inqui-ries regarding rates. While there is no duty that credit unions respond to rate inquiries, if the credit union elects to respond, standard oral disclosure infor-mation must be provided. The required disclosure information is much less than the full TISA account disclosures.

Any rates quoted by the credit union must be stated as an annual percent-age yield (APY). For dividend-bearing accounts (except term share accounts), the credit union must disclose the APY



as of the last dividend declaration date or the prospective APY offered on the account. For term share accounts and interest-bearing accounts, the APY dis-closed must be accurate as of the last seven calendar days. The credit union must also (1) state that the APY is accu-rate as of a specified date and (2) pro-vide a telephone number for members to call to obtain current rate information.

The dividend/interest rate figure may also be provided, but not in lieu of the APY figure. No other rate may be stated. Credit union staff responding to oral rate inquiries need only provide disclo-sures as appropriate. (For example, the requirement to give a telephone num-ber to call about rates for a term share account would not be necessary when a member was calling for a rate.)

Note: Similar to the redundant tele-phone number information, the accu-racy date for a term share account rate should not be necessary if the rate is current as of that day and the rate pro-vided disclosed as current.

To the extent the oral rate inquiry involves a request for account disclo-sures rather than an account rate, the credit union must provide the TISA account disclosures as explained in the following text.

Account-opening disclosures

General disclosure rules

Credit unions must make disclosures as applicable, clearly, conspicuously, and in writing, in a form the member may keep. These disclosures can be delivered either in paper or electronic form. If the member agrees to receive these disclosures electronically via their

e-mail address or retrieve them from the credit union’s website, the credit union must follow the regulation’s require-ments for electronic communication. See the Electronic Communication sec-tion for details.

The TISA account disclosures for each account may be presented sepa-rately, or combined with disclosures for other accounts and services (for exam-ple, Regulation CC funds availability disclosures and Regulation E Electronic Fund Transfer disclosures), as long as it is clear which disclosures are applicable to the member’s account. The TISA disclosures may be provided in multiple account documents (for example, a sig-nature card, rate sheet, fee schedule, and brochure describing other terms), but all relevant documents must be pro-vided at the same time. If an account is held by more than one accountholder, disclosures may be made to any one of the account holders.

Note: A credit union should avoid TISA account disclosures that cross ref-erence terms or information contained in a credit union’s bylaws or other collat-eral documents unless the credit union intends to provide copies of its bylaws or other collateral documents along with its TISA account disclosures.

There is no particular type size or “more conspicuous” standard or segre-gation requirements for the disclosures. Other than the terms “annual percent-age yield” and “dividend rate,” there are no required terms or conspicuous term requirements. The term “annual percent-age yield” must be used when referring to a rate of return and, for purposes of account disclosures, must be so labeled. There is no APY abbreviation provision.



The annual percentage yield, annual percentage yield earned, and dividend rate figures must be rounded to the nearest 1/100 of one percent (.01%) (for example, 5.644% would be rounded to 5.64%) and disclosed to two deci-mal places. However, for TISA account disclosures, the dividend rate may be expressed to more than two decimal places. There is a 1/20 of one percent-age point (.05%) tolerance for accu-rate disclosure of the annual percent-age yield and annual percentage yield earned. There is no tolerance for divi-dend rates.

Account opening

A credit union must provide the TISA account disclosures to a member or potential member before an account is opened or services provided (for exam-ple, a credit check fee is imposed before opening an account), whichever is ear-lier. The same holds true when an indi-vidual opens an account via the credit union’s website. The member or poten-tial member must be required to access the TISA disclosures before the account is opened or the credit union provides services, whichever is earlier. A link to the disclosures satisfies the timing rule if the member cannot bypass the disclo-sures before opening the account. Or the disclosures must automatically appear on the screen even if multiple screens are required to display the entire disclo-sure. The credit union is not required to confirm that the member has read the disclosure.

New account disclosures need not be provided for a subsequent account open-ing if proper disclosures were previously

provided and the disclosures remain accurate at the time of the new account opening. If the account is not opened in person (for example, telephone, mail, or wire transfer), the TISA account dis-closures must be mailed or delivered to the address shown on the credit union’s records no later than 10 business days after the account opening.

The renewal of a term share account that does not automatically renew (non-rollover) is a “new account,” which requires new disclosures. In contrast, the renewal of an automatically renew-able (rollover) term share account is not a new account and does not require new TISA account disclosures.

Upon request

Credit unions are required to provide TISA account disclosures to any member or potential member upon request. If the individual is not at the credit union when the request is made (for example the request is made over the telephone), the disclosures must be mailed or deliv-ered within a reasonable time (10 busi-ness days after the request is made). Disclosures can be in paper form or be provided electronically.

When providing disclosures electroni-cally, the credit union must send the disclosures to the member or potential member’s e-mail address or send the member a notice describing the location of the disclosures on the credit union’s website. Posting the disclosures on the website, however, does not relieve a credit union’s duty to provide disclo-sures upon request. See the Electronic Communication section for details on providing electronic disclosures.

NOTE:

Credit unions with account representatives must closely review their procedures to determine whether certain initial membership activities constitute the opening of an account.



Content of TISA account disclosures

The TISA account disclosures must contain eight categories of information to the extent applicable. Sample cop-ies of the Loanliner® Truth In Savings Rate and Fee Schedule for savings and checking accounts, and Form D3100 Rate and Fee Schedule for certificate accounts, are included as Appendix 1-A and 1-B to this section.

The type of rate information that needs to be disclosed depends on whether the account is a fixed-rate or variable-rate account. Fixed-rate accounts are any accounts that are not variable-rate accounts. This means an account in which the rate will not change unless the credit union con-tracts to give at least 30 calendar days’ advance written notice of dividend/inter-est rate decreases.

(For example, credit unions’ term share accounts and state-chartered credit unions’ payment of interest on deposit accounts are considered fixed-rate accounts.)

A variable-rate account is an account in which the dividend/interest rate may change after the account is opened.

However, if the credit union contracts to change rates but only after providing the member at least 30 calendar days’ advance written notice of rate decreases, the rate would constitute a fixed-rate.

Note: Except for term share accounts in which credit unions promise fixed-rate returns, there is little, if any, advantage to offering fixed rates on transaction or savings-type accounts. Under variable-rate accounts, credit unions gain the benefit of changing rates without notice.

• APY and dividend rate. Credit unions must disclose the APY and dividend rate (or interest rate, if applicable) effective the day of the account open-ing. For dividend-bearing accounts, except term share accounts, the APY and dividend/interest rate must be either as of the last dividend declara-tion date, or the prospective (antici-pated) rate and APY offered for that dividend period. Credit unions cannot guarantee dividend rates, but can provide prospective rates and APYs. For term share accounts and interest-bearing accounts, the rate and APY must be the rate and APY offered that day. Also, for fixed-rate accounts, the period of time the dividend rate will be in effect (for example, for at least thirty days) must also be disclosed.

Note: No retroactive rate setting is permissible on any term share account including club accounts that are term share accounts.

In the case of variable-rate accounts, four additional disclosures are required: (1) the fact that the dividend rate and APY may change, (2) how the dividend rate is determined (for example, identify the index or state that the rate is deter-mined by the credit union’s board), (3) the frequency with which the dividend rate may change (for example, weekly, monthly, and so on; credit unions that reserve a right to change rates at any time must state that fact.), and (4) any limitation on the amount the dividend rate may change (for example, rate floor or ceiling; if there are no limitations, the credit union may, but need not, disclose that fact).

A stepped-rate account is an account that has two or more divi-



dend rates that take effect in suc-ceeding periods and are known when the account is opened (for example, a one-year term share account with a 5% dividend rate for the first six months, a 6% rate for the second six months). For stepped-rate accounts, each rate must be disclosed, but only one (composite) APY may be given. A tiered-rate account is an account that has two or more dividend rates that are applicable to specified balance levels (for example, 5% paid on balances below $1,000; 6% on balances of $1,000 and above). Unlike stepped-rate accounts, there is no single com-posite APY for tiered-rate accounts. Each applicable dividend rate and the corresponding APY must be given, and the applicable tier balance method used must be disclosed [for example, Tier Method A (Full Balance) or Tier Method B (Pure); see Appendix A to NCUA Part 707, APY Calculator for a discussion on these methods].

Note: A credit union policy that div-idends are not paid below a specified amount would not constitute a tiered-rate account. Similarly, the credit union cannot label the nondividend portion as earning 0%, as zero is not a rate. This policy would violate the gen-eral rule that dividends are paid on the full balance of the account.

• Compounding and crediting policies. The frequency with which dividends or interest are compounded and credited must be disclosed (for example, quar-terly or monthly). If the credit union will not pay dividends or interest that has accrued but has not been credited on an account that is closed, that fact

must be disclosed. For dividend-bear-ing accounts, the dividend period (for example, monthly, quarterly, etc.) must be disclosed. If the member will for-feit dividends if they close an account before accrued dividends are credited, a statement that the dividends will not be paid in such cases.

• Balance information. The credit union must make four types of balance dis-closures: (1) any minimum balance required to open the account, avoid the imposition of a fee, or obtain the APY disclosed, (2) the balance com-putation methods for dividends (daily or average daily method), (3) the mini-mum balance determination, including an explanation of how the balance is determined; or (4) the credit union’s membership share par value.

Note: While NCUA seems to equate membership share par value with a minimum balance requirement, credit unions should be careful not to confuse the two. Minimum-balance requirement features require careful account price planning, independent of any par value requirement. Also, credit unions may have various mini-mum balance requirements for differ-ent accounts, but there is generally only one membership share required for all accounts, not each account.

• Fees. The amount of any fee that may be imposed in connection with the account (or an explanation of how the fee will be determined) and the con-ditions under which the fee may be imposed (name and description of fee) must be disclosed. The commentary includes the following list of fees that are considered related to the routine



use of an account:

1. Maintenance fees (for example, a monthly service fee)

2. Fees related to deposits or with-drawals (per-check fees, ATM fees)

3. Fees for special services (stop-pay-ment requests; balance inquiries; fees to certify checks)

4. Return check fees

5. Fees to open or close accounts

6. Check printing fees (a range of pric-es or a statement that prices vary)

7. Dormant account fees

Fees that may be charged for ser-vices unrelated to a particular account, such as traveler’s check fees, cashier check purchase fees, wire transfer fees, safe deposit fees, or “incidental fees,” such as photocopy fees or state-ment copy fees, need not be disclosed. Also, fee disclosures required under Regulation E do not have to be dupli-cated so long as the Regulation E dis-closures are provided at the same time.

• Transaction limitations. The credit union must disclose any limitations on the number or dollar amount of withdrawals or deposits (for example, minimum withdrawal limits on sav-ings accounts under Regulation D, minimum withdrawal amounts or restrictions on deposits to term share accounts). Regulation E disclosures will satisfy this requirement to the extent of limitations on the frequency and amount of Electronic Funds Transfers.

• Nature of dividends. For dividend-bearing accounts other than term share accounts, credit unions are required to include a statement that dividends are

paid from current income and avail-able earnings after required transfers to reserves at the end of a dividend period. This disclosure should protect credit unions in the rare event a pro-spective dividend rate cannot be paid or is not properly payable.

• Features of term share accounts. The term term share accounts includes time deposits, time or term share accounts, share certificates, and certificate of deposit accounts with a maturity of at least seven days in which withdrawals are restricted, unless an early withdrawal penalty of at least seven days’ dividends applies. A Christmas or vacation club account that contains both a maturity date and an early withdrawal penalty feature would be considered a term share account for purposes of these disclo-sures.

There are four required disclosures for term share accounts, to the extent applicable: (1) the maturity date, (2) early withdrawal penalties, (3) conse-quences of withdrawal prior to matu-rity, and (4) a statement of whether or not the account will renew automati-cally at maturity. If it will, a statement of whether or not a “grace period” must be provided and the length of the grace period.

Note: The term “grace period” means a period following the maturity of an automatically renewing term share account during which the mem-ber may withdraw funds without being assessed a penalty. A credit union has the option of providing a grace period or not. If it does not renew auto-matically, a statement must be made

NOTE:

Generally, credit union club accounts are structured as savings or regular share accounts, and do not contain a maturity date. Also, by definition, NCUA states club accounts are not term share accounts unless they also require a penalty of at least seven days dividends for withdrawals in the first six days after the account is opened.



whether dividends/interest will be paid after maturity if the member does not renew the account.

• Bonuses. If the credit union offers a “bonus” for opening, maintaining, renewing, or increasing an account balance, the TISA account disclosures must include the following disclosures, if applicable: 1) the amount or type of any bonus, 2) when the bonus will be provided, and 3) any minimum bal-ance and time requirements to obtain the bonus.

Periodic Statement Disclosures

General rules

If a credit union mails or delivers a periodic statement, the statement must include certain required TISA disclosures for each account on the statement known as “periodic statement disclosures.” A periodic statement means a state-ment setting forth information about an account (other than newsletters and promotional materials) that is provided to a member on a regular basis four or more times a year. Credit unions are not required to send periodic statements, but disclosures are required if the credit union chooses to send such statements.

Periodic statements can be delivered electronically as long as the credit union complies with the consumer consent provisions of the Electronic Signatures in Global and National Commerce Act (ESIGN). NCUA’s TISA regulation was revised to reflect ESIGN’s requirement that disclosures be provided in elec-tronic form only if the member or poten-

tial member “affirmatively consents” after receiving certain information. See the Electronic Communication section for full details and the RegTraC General Operations Regulations book for infor-mation on ESIGN’s requirements.

Disclosures provided by mail or e-mail are considered timely based on when the disclosures are sent. Disclosures posted on an Internet website, such as periodic statements, change-in-terms notices, or other notices are considered timely when the credit union has both made the dis-closures available and sent a notice to the member that the disclosures have been posted.

NCUA’s previous regulation address-ing the electronic delivery of periodic statements was withdrawn. However, credit unions will not have to redeliver disclosures subject to ESIGN’s consent provisions for members who agreed to receive periodic statements electroni-cally under NCUA’s earlier rule.

Content of periodic statement disclosures

“Annual Percentage Yield Earned” usage required

The periodic statement must show the annual percentage yield earned, using this exact term. No abbreviations such as APY earned or APYE are allowed. The annual percentage yield earned reflects the relation of the actual dividend/inter-est earned during the statement period and the balance in the account for the same period. This disclosure should capture all rate changes that occurred, producing a single composite annual percentage yield earned. (For tiered-rate accounts, the single annual percent-



age yield earned figure demonstrates the effect of the tiering method on total earnings.) The figure is not affected by fees imposed or bonuses provided, and should be distinguished from the pro-spective annual percentage yield earned figure used for account disclosures and advertising. This is a “historical” figure, not a projected figure, and is formulated differently according to specific calcula-tions set forth in Appendix A, Part 2 of the NCUA rule.

Amount of dividends/interest earned

The periodic statement must show the dollar amount of dividends/interest earned during the statement period. This disclo-sure may show either dividends accrued but not yet credited to the account or divi-dends paid and credited to the account.

However, if a member closes an account between crediting periods and forfeits accrued dividends, the credit union may not show any figures for “divi-dends earned” or annual percentage yield earned for the period.

If no dividends are earned for a state-ment period, credit unions need not state that fact or may show “$0 dividends earned” and a “0% annual percentage yield earned.”

The amount of any extraordinary dividends earned during the statement period is not a component of the annual percentage yield earned, but must be disclosed as a separate figure.

Bonuses should be excluded from the total dividend/interest figure, but the value of any bonuses could be disclosed elsewhere on the statement as additional information.

Fees imposed

The periodic statement must disclose all fees of the type required under the initial account disclosures that were debited from the account during the statement period, such as monthly fees, NSF charges, or stop payment fees. The fees shall be itemized by type and dol-lar amounts and must be identified the same as they are in the account disclo-sures. See also: “Overdraft Privilege Plans” regarding the aggregate disclo-sure of overdraft and returned item fees on periodic statements.

Fees related to a credit account such as fees for accessing an overdraft fea-ture (covered by Regulation Z) and ATM fees (covered by Regulation E) would be excluded from the TISA disclosure. Similarly, fees not imposed in connec-tion with the account (such as safe deposit box fees or wire transfer fees) would be excluded. The periodic state-ment need not include a total fee figure or a net earnings figure (that is, the total dividend earned less any fees imposed).

Number of days in period

The statement must show either the total number of days in the statement period or the beginning and ending dates of the period. Current statements typically provide the beginning and end-ing dates for the period. The statement must clearly disclose whether the begin-ning and ending dates are included, such as “May 1 through May 31.”

Optional information on periodic statements

Additional information may be shown on a statement including: dividend



rates, year-to-date dividends, bonuses paid, and excluded fees.

Special rules for noncalendar month crediting

NCUA provides a special rule for cred-it unions that calculate dividends for a period other than the statement period (for example, quarterly, or from the 16th of one month to the 15th of another month). Credit unions may disclose the required information either upon each periodic statement or upon the state-ment on which dividends are actually earned or credited to the account. For example, if a credit union has quarterly dividend periods or uses a quarterly average daily balance on an account, the first two monthly statements may not state annual percentage yield earned and dividends earned figures; the third “monthly” statement will reflect the div-idends earned and the annual percent-age yield earned for the entire quarter.

Each statement must show both the length of the statement period and divi-dend period. However, the fees imposed disclosure must be included on the periodic statement on which they are imposed. Credit unions that calculate dividends monthly but only send quar-terly statements may show one single dividend figure and annual percentage yield earned for the quarter or three divi-dend figures and three annual percent-age yield earned figures so long as the dividend periods are shown.

Overdraft Privilege Plans

In 2005, the Federal Reserve Board and NCUA amended their Truth in

Savings regulations to address overdraft privilege plans. These regulations only required financial institutions that pro-moted the payment of overdrafts to dis-close on the periodic statement the fees charged for overdraft services and the fees charged for returning items unpaid, for the both the statement period and year-to-date.

In 2008, the Fed amended its regu-lation with the NCUA following suit in 2009. The amended rules required all financial institutions to disclose the periodic and year-to-date overdraft fees and returned item fees on periodic statements, regardless of whether they promoted the payment of overdrafts. The amended regulations also addressed bal-ance disclosures provided to consumers through automated systems, such as ATMs, telephone response systems and websites. The mandatory compliance date was January 1, 2010.

Account-opening disclosures

TISA requires the disclosure of any fee that may be imposed in connection with the account and the conditions when it may be imposed. Credit unions must specify in their TISA account-opening disclosures the categories of transactions an overdraft fee may be imposed on.

This description does not have to be an exhaustive list. Model language is included in which the credit union may simply state that the fee is imposed for overdrafts “created by checks, in-person withdrawals, ATM withdrawals, or by other electronic means,” as applicable. However, describing the fee as a fee for “overdraft items” is not sufficient since



this would not describe whether it would apply only to share drafts or whether it applies to other transactions, such as ATM withdrawals or other types of elec-tronic transactions.

Periodic statement disclosures

All credit unions must disclose on periodic statements a total dol-lar amount for all overdraft fees and returned item (NSF) fees imposed on a member’s account. The credit union must disclose separate totals for the statement period and for the calendar year-to-date. The total dollar amount includes per-item fees as well as interest charges, daily or other periodic fees, or fees charged for maintaining an account in overdraft status, whether the overdraft is by check or by other means. It does not include fees for transferring funds from another member account to avoid an overdraft, or fees related to overdraft lines of credit subject to Regulation Z.

The total dollar amount for all fees for returning items unpaid must include all fees charged to the account for dis-honoring or returning checks or other items drawn on the account. The credit union must disclose separate totals for the statement period and for the calen-dar year-to-date. Fees imposed when deposited items are returned are not included.

The disclosure must be made in a tabular format (including gridlines) and be near the other itemized fees. The regulation includes a sample form for making this disclosure. The credit union must use this sample format, or a sub-stantially similar one, when making this disclosure.

The fee disclosure does not have to be provided if no fees have been charged whatsoever. If a fee is waived in a later periodic statement period, the credit union may (but is not required to) show that adjustment in the year-to-date total on that later statement. If the fee is assessed and waived during the same statement period, the credit union may at its option show the adjustment in both the year-to-date total and the total for that statement period.

Advertising disclosures

Credit unions that promote the pay-ment of overdrafts are required to include the following disclosures in their advertisements for this service.

• The applicable fee or charge.

• The categories of transactions that are covered. The model language for account-opening disclosures may be used.

• The time period members have to repay or cover the overdraft. If a credit union reserves the right to require repayment immediately or on demand, instead of providing a specific time period for repayment, the credit union

Sample Aggregate Overdraft and Returned Item Fees Sample Form

Total For This Period

Total Year-to-Date

Total Overdraft Fees

$60.00 $150.00

Total Returned Item Fees

$0.00 $30.00

(Appendix B to Part 707, Sample B-12)

http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&SID=a0bd00406c140b715a5bb646efaf2d4b&rgn=div5&view=text&node=12:7.0.2.3.8&idno=12#12:7.0.2.3.8.0.1.12.12



may comply with the requirement by disclosing this information.

• The circumstances when the credit union would not pay an overdraft. The official staff interpretation provides the following model language: “Whether your overdrafts will be paid is discre-tionary and we reserve the right not to pay. For example, we typically do not pay overdrafts if your account is not in good standing, or you are not making regular deposits, or you have too many overdrafts.”

Stating the available overdraft limit or the amount of funds available on a periodic statement would be considered an advertisement that would trigger the required disclosures. The rule provides exceptions to these requirements, simi-lar to those described above for periodic statement disclosures. For example, the advertising disclosure requirements will not apply when providing educational materials, responding to member-initiat-ed inquiries about overdrafts or deposit accounts, or notifying a member about a specific overdraft on their account.

These advertising disclosures are also not required on ATM receipts or for advertisements using broadcast media, such as television or radio, or outdoor media, such as billboards. These excep-tions do not apply to advertisements on Internet websites, ATM screens, adver-tisements on telephone response sys-tems, or those sent by e-mail. However, limited disclosures are required on an ATM screen, on telephone response machines and on indoor signs. The spe-cific disclosures described above regard-ing the categories of transactions cov-ered and the circumstances in which the

credit union will not pay an overdraft will not be required for advertisements made through these methods. Advertisements on indoor signs must indicate that fees may apply and that the member should contact an employee for further informa-tion about fees and terms.

Prohibiting misleading advertisements

The interim final rule expanded TISA’s prohibition against advertise-ments, announcements, or solicitations for new accounts that are misleading or misrepresent the deposit contract to include communications with current members about the terms of their exist-ing accounts. The following are exam-ples of misleading advertisements:

• Representing an overdraft service as a “line of credit.”

• Representing that the credit union will honor all checks or transactions, when the credit union has discretion to not honor a transaction.

• Representing that members with an overdrawn account are allowed to maintain a negative balance when the terms of the overdraft service require the member to promptly return the account to a positive balance.

• Describing the overdraft service solely as protection against bounced share drafts when the credit union also per-mits overdrafts in connection with ATM withdrawals or other electronic fund transfers.

• Describing the account as “free” or “no cost” in an advertisement that also promotes a service in which there



is a fee, such as an overdraft service, unless the advertisement for the account clearly indicates that there is a cost for this service. Advertisements for the overdraft program itself must disclose the amount of the fee, as well as the other required information.

Disclosure of account balances

When displaying available balance information on an ATM screen, website or telephone response system, NCUA’s Part 707 prohibits a credit union from including any additional amounts that may be provided through overdraft pro-tection plans, lines of credit, or through transfers from other accounts.

The balance may, but need not, include funds that are deposited in the member’s account, such as from a check, that are not yet made available for withdrawal in accordance with the funds availability rules (Regulation CC). In addition, the balance may, but need not, include funds that are held by the credit union to satisfy a prior obligation of the member, for example, to cover a hold for an ATM or debit card transac-tion that has been authorized but for which the credit union has not settled.

The credit union may choose to dis-play a second balance that includes amounts available through an overdraft protection plan, as long as it promi-nently discloses that this second bal-ance includes the additional amount. Disclosing the second balance simply as the “unavailable balance” or “available funds” will not be sufficient.

The ATM should not display a second balance connected to an overdraft ser-vice for members who have opted-out

of the service (or have not opted-in, if applicable). In the case of members who opt-out of some, but not all, of the credit union’s overdraft services (e.g., member elects overdraft services for ATM and point-of-sale [POS] debit card transactions only), the credit union may provide the second balance, but only if the balance information indicates that overdraft funds are not available for all transactions.

Disclosures upon Maturity and Changes in Terms

Renewal notices for rollover term share accounts

Term share accounts that automati-cally renew at maturity without member action request (“rollover” or “renewal term share accounts”) are not treated as the opening of a new account. Thus, for most term share accounts less disclo-sure is required at renewal. For a term share account with a maturity of more than one month, credit unions must mail or deliver a notice containing both matu-rity and renewal account information at least 30 calendar days before maturity or 20 calendar days prior to the end of a five-day grace period (except short-term accounts).

The type of account disclosures in a renewal notice depends on the term of the term share account. For rollover accounts with maturity greater than one year, the notice must state the date the existing account matures, and the full account disclosures applicable on renewal must be provided. If the divi-dend rate and APY are undetermined



at the time of notice, the credit union shall state that rates have not been determined, specify the date they will be determined, and include a credit union telephone number to call to obtain the rate and APY for the new account.

For rollover accounts with a maturity greater than one month but less than one year, the credit union has two options: (1) the renewal notice would state the date the existing account matures, the new maturity date of the renewal account, the dividend rate and APY, if known (or if unknown, the date it will be determined and a telephone number), and any dif-ferences in terms between the existing and renewal accounts or (2) the full TISA account disclosures in the manner dis-cussed above.

For rollover accounts with a maturity of one month or less, credit unions must provide a renewal notice disclosing any differences in the terms between the existing and the renewal account (except the dividend rate and the APY) within a reasonable time after renewal (generally 20 days).

A sample of the Loanliner Account Renewal Notice is included as Appendix 1-C to this section.

Maturity notices for nonrollover term share accounts

For term share accounts (maturity greater than one year) that do not roll over but renew only upon the member’s request, the credit union must give a maturity notice to members. A renewal is considered a new account requiring full account disclosures. The maturity notice must be mailed or delivered at least ten calendar days before a maturity and

state the maturity date and whether divi-dend/interest will be paid after maturity. For nonrollover accounts with maturity less than one year, no maturity notice is required. Again, a renewal is considered a new account requiring full account disclosures. A sample of the Loanliner Account Maturity Notice is included as Appendix 1-D to this section.

Change-in-terms notice

Credit unions must give advance notice to affected members (members holding the account being changed) of any change in terms required under the initial TISA account disclosure require-ments, if the change may reduce the APY or adversely affect the member. The notice must be mailed or delivered at least 30 calendar days before the effec-tive date of the change. (If the change affects a Regulation E term, the shorter Regulation E change-in-terms rules may apply.) The notice must be in writing in a form the member can keep and must describe the change and state the effec-tive date of the change. The notice may be included on a periodic statement or in another mailing.

When overdraft protection services or bounce protection services are added to an existing account, a change in terms notice, 30 days prior to the effective date of the change, may be required if the fee for the service exceeds the fee for accounts that do not have the ser-vice. An advance change in terms notice would not be required if the account opening disclosures stated that an over-draft check may or may not be paid and the same fee would apply.

A change-in-terms notice is not



required for: changes in the dividend/interest rate and corresponding changes in the APY for variable-rate accounts; changes in fees for share draft and check printing fees; changes in any term for short-term term share accounts (one month or less); or terms that will auto-matically change upon the occurrence of a stated event, provided the contem-plated change is fully described in the TISA account disclosures (for example, expiration of a reduced or waived fee promotion).

Advertising

The TISA advertising rules control what information must be disclosed and the manner in which the information is presented in order to give members stan-dardized deposit account information to enhance comparative shopping.

These rules include general rules prohibiting inaccurate and misleading advertisements, rules for advertising key deposit terms like “APY” and “bonus-es,” the additional disclosures triggered by use of such terms, and exemptions for certain types of media.

Scope of the advertising rules

The rule defines advertisement as a commercial message appearing in any medium that promotes directly or indi-rectly the availability of, or deposit in, an account. While this term is not defined in the rule, it means virtually anything that conveys a message promoting a deposit account product. There is one express exception in the rule for “rate sheets” that are published in newspa-pers, periodicals, or trade journals.

Account rate sheets are not consid-ered commercial messages (and thus not advertising) as long as there is no fee paid by the credit union and no control by the credit union over whether the information will be published.

The term account covers all share and deposit accounts offered to or held by members. IRA advertisements fall within the advertisement rules to the extent that the funds are held in a credit union account. Promotional messages that cross-sell deposit products are advertise-ments, including promotions that appear in leaflets, brochures, periodic account statements, and statement stuffers. Advertisements of financial services, such as safe deposit boxes and cashier’s checks, are not covered. Similarly, annu-ities are not covered because they are not a deposit account.

Credit union newsletters, lobby rate boards, and certain types of advertising media require less disclosure of account information due to the inherent limita-tions of time and space in such media. The special media include: (1) broad-cast and electronic media, (2) outdoor media, such as billboards, and (3) tele-phone response machines.

Prohibition on misleading or inaccurate advertising

NCUA’s rule contains a broad prohibi-tion that “an advertisement shall not be misleading or inaccurate and shall not misrepresent a credit union’s account contract.” The prohibition applies to all advertisements regardless of the ad con-tent or the media used.

The rule contains a specific prohibi-tion of advertising an account using the



terms “free,” “no cost,” or other words having similar meaning (for example, fees waived) if any regular maintenance or activity fee may be applied to the account. Thus, if there are no mainte-nance fees related to the account or any costs for the member to have or use an account, it can be advertised as “free.”

A maintenance or activity fee includes transaction and service fees members reasonably expect to be regu-larly imposed on an account. For exam-ple, monthly service charges, and fees imposed to deposit, withdraw, or trans-fer funds, (including per-share draft or check charges, or $0.25 for each with-drawal, by check or in person). It also includes fees imposed if a minimum bal-ance requirement is not met or if a trans-action limit is exceeded. A maintenance fee would not include stop-payment fees, fees for returned items, NSF fees, fees unrelated to the account (such as cashier’s check fees), third-party check printing charges, fees for copies of share drafts or checks, dormant account fees, balance inquiry fees, fees to use a pro-prietary or nonproprietary ATM, and fees for electronic transfer services that are not required to obtain an account (such as preauthorized transfers or home elec-tronic credit union services.)

If the account is free for a limited time, the time restriction must be stat-ed. Credit unions may not use a term such as “fees waived” if a maintenance or activity fee may be imposed since it is similar to the terms “free” or “no cost.” However, credit unions may advertise accounts as “free” for members who meet conditions not related to share accounts, such as the member’s age (for example, “free for persons over 65 years

old”). In contrast to the free account prohibition, credit union services may be advertised as “free” or with “no cost,” so long as there is no fee imposed for the service or feature. For example, a credit union that offers free ATM services could advertise that fact. If the service is free for a limited time, the time restric-tion must be stated.

Disclosure requirementsGeneral rules

If any rate or yield is stated in an advertisement, it must be the annual percentage yield using that term. While advertisements are not required to dis-close an annual percentage yield (unless a bonus is stated), if the credit union states a rate or yield, the rate or yield must be stated in terms of the annual percentage yield. If an advertisement discloses an annual percentage yield as of a specified date, that date must be recent in relation to the publication.

An advertisement can state the divi-dend rate as long as the annual percent-age yield is also disclosed. If a dividend rate is stated, the term “dividend rate” must be used, and the rate stated must correspond to the annual percentage yield stated. The abbreviation “APY” may be used, provided that the term “annual percentage yield” is stated at least once in the advertisement. The term “dividend rate” cannot be abbreviated.

In addition, a dividend rate can be stated only if it is provided in conjunc-tion with, but not more conspicuously than, the annual percentage yield it relates to. Advertisements on a credit union’s website must display both rates simultaneously. This requirement is not



satisfied if the individual can only view the annual percentage yield by using a link to another location.

There are special format rules for advertising tiered-rate accounts. The annual percentage yield for each tier must be shown in the advertisement along with the corresponding tier bal-ance requirements. Also, an advertise-ment that states a dividend rate for a stepped-rate account must state all the dividend rates and the time period that each rate is in effect.

Representative example

An advertisement that states an annu-al percentage yield for a type of account need not state the annual percent-age yield applicable to every variation offered by the credit union. If rates vary depending on the initial deposit amount or term for a term share account, a representative example may be shown clearly describing the annual percent-age yield offered and stating that various rates are available. (For example, “our six-month share certificate currently pays a 3.15% annual percentage yield,” and “we offer share certificates with annual percentage yields that depend on the maturity you choose.”)

APY disclosures

If an APY is stated in an advertise-ment, additional advertising disclosures relating to fees and terms applicable to the account must be given (the “APY disclosures”). General rate information in an advertisement will not be consid-ered trigger terms so long as rates are not determinable from the advertisement

“for example, 1% over our current rate.”There are six disclosures, triggered

by the APY. These disclosures must be shown in the ad, clearly and conspicu-ously, as follows:

1. Variable-rate accounts. If the adver-tisement covers a variable-rate account, the ad must also state that the “rate may change” after the account is opened.

2. Time the APY is offered. The ad must provide an accuracy disclosure as fol-lows: 1) for dividend-bearing accounts except term share accounts, a statement that the APY is accurate as of the last dividend declaration date or that the disclosed prospective APY is accurate or 2) for interest-bearing accounts and dividend-bearing term share accounts, the period the APY is offered for that account or a statement that the APY is accurate as of a specified date. For example, “the APY is offered as of Sept. 7, 2013.”

3. Minimum balance. The minimum bal-ance required to obtain the advertised APY must be disclosed. For tiered-rate accounts, the minimum balance require-ment for each tier must be stated in close proximity to the applicable APY and given equal prominence.

4. Minimum opening deposit. The mini-mum balance requirement to open an account must be provided if it is greater than the minimum balance necessary to obtain the advertised APY.

5. Effect of fees. A statement that “fees could reduce earnings” must also be included if maintenance or activity fees could be imposed that would reduce earnings (for example, monthly service charges, per-draft charges, a fee if a minimum balance is not maintained).

NOTE:

The credit union should provide a reference in the advertisement indicating the APY is accurate as of the date of publication.



Neither the applicable fee nor the condi-tions for imposing the fee need be shown in the advertisement.

6. Features of term share accounts. For term share accounts, a statement of the term of the account and a statement that a penalty will or may be imposed for early withdrawal must be provided. The phrase “will or may” is used to cover credit unions that impose early with-drawal penalties either on a mandatory basis or discretionary basis.

Bonus disclosures

If a bonus is offered in an advertise-ment, additional advertising disclo-sures relating to terms applicable to the account must be given (the “bonus disclosures”). A general reference to bonuses or the word “bonus” itself is not a trigger term (for example, “bonus checking”).

A bonus is a premium, gift, award, or other consideration, paid in cash or merchandise, worth more than $10 dur-ing the course of a year, given or offered to a member for opening, maintaining, renewing, or increasing an account bal-ance. Under the commentary, NCUA states that credit unions may rely on IRS valuation standards to determine the $10 de minimis value standard (for example, fair market valuation). Credit unions must aggregate per account, per calendar year, any items given to a member that are individually valued at $10 or less. Such items will be a bonus if their aggregate value exceeds $10. De minimis incentives, such as pens or cof-fee mugs (with a market value of $10 or less), and any waiver or reduction of an account fee, the absorption of expenses

(for example, free checks), nondividend membership benefits, extraordinary divi-dends, and life savings benefits, regard-less of value, are excluded from the term “dividends.”

Note: Because the term “bonus” excludes most incentives credit unions offer with accounts (for example, the waiver or reduction of fees or the absorp-tion of expenses, nondividend member-ship benefits, extraordinary dividends), bonus disclosures will be triggered only in limited situations (for example, cash or merchandise worth more than $10).

There are five disclosures triggered by a bonus. These disclosures must be shown in the ad as follows:

1. The annual percentage yield must be stated using that term. Since the APY is itself a trigger term, the five annual percentage yield disclosures must also be given.

2. A statement of the time requirement necessary to obtain the bonus.

3. A statement of the minimum balance required to obtain the bonus. If the balance requirement is the same as for the APY, the disclosures may be combined.

4. The minimum balance required to open the account must be given if it is greater than the balance necessary to obtain the bonus.

5. The ad must state when the bonus will be paid or provided to the member.

Note: If a credit union’s Web adver-tisement displays a triggering term (such as a bonus or annual percentage yield) the advertisement must clearly refer the member or potential member to the location where the additional required



information begins. For example, an advertisement that includes a bonus or annual percentage yield can include a link that takes the individual to the addi-tional information.

Credit union newsletters, lobby signs, and special media

There are limited advertising dis-closures required for advertisements through special media such as credit union newsletters, indoor signs, and electronic media.

Credit union newsletters sent to exist-ing members or reasonably calculated to reach only members (for example, news-letters displayed or offered in the credit union lobby) are generally not subject to the advertising requirements but are subject to the minimal rules. The credit union newsletter must include the APY if a rate is stated and must contain a notice advising members to contact the credit union for further information on applicable fees and terms. A dividend rate may be shown in conjunction with the APY that it refers to.

Indoor signs (including computer screens, banners, preprinted posters) and lobby boards located inside a credit union are generally not subject to the advertising requirements. The exemp-tion for lobby boards applies to signs inside the premises of the credit union, including signs facing outside which are intended to be viewed from outside. Advertisements on inside banners, pre-printed posters, chalk boards, and com-puter screens are subject to the same exemption that applies to lobby boards.

TIS regulations require additional disclosures in ads that promote the pay-

ment of overdrafts. These include the amount of the overdraft fee, the trans-actions in which they apply, the time period in which the member must repay the overdraft, and the circumstances in which the overdraft will not be repaid. However, the credit union’s opt-in/opt-out notice that it provides with regard to the payment of overdrafts is a com-munication that is not subject to these additional disclosures.

Note: Advertisements may be “indoor signs” even though members from out-side may view them. For example, a ban-ner located behind a teller counter fac-ing members but readable by a passerby is still an indoor sign.

Electronic Disclosures

Truth in Savings disclosures that are required to be in writing can be provided electronically as long as the credit union complies with the consumer consent provisions of the Electronic Signatures in Global and National Commerce Act (ESIGN) of 2000. Under Part 707, TIS disclosures must be provided before the account is opened or the service is pro-vided — this includes instances when a member or potential member who is not present at the credit union uses an Internet website or other electronic means to open an account or request a service.

ESIGN requires that members “affir-matively consent” before receiving elec-tronic disclosures relating to a transac-tion when those disclosures are required by law or regulation to be in writing. Before a member can give consent, the credit union must provide the member with a disclosure informing them of



their rights as they relate to electronic transactions. This disclosure must also include a statement of the hardware and software requirements for access and retention of electronic records. For more information on ESIGN, see the RegTraC General Operations Regulations book. In addition, electronic disclosures remain subject to TISA’s format, timing, and retainability rules as well as the “clear and conspicuous” standard.

Certain disclosures are not considered “related to a transaction” for purposes of ESIGN’s consumer consent provision. These include disclosures used in con-nection with advertisements as well as disclosures about deposit accounts that are provided upon request. Advertising disclosures fall under this exception since they are considered to be available to the general public. Disclosures given to members and potential members upon request are exempt as these recipients may decide not to open an account. Those who do open accounts should receive timely disclosures subject to the consent requirements at account opening.

State Law, Model Clauses, Enforcement

Pre-emption of state law

State law requirements that are inconsistent with requirements of NCUA Part 707 are pre-empted to the extent of the inconsistency. A state law is incon-sistent if it requires a credit union to make disclosures or take actions that contradict the requirements of federal law. In other words, if the credit union can comply with state law without violat-

ing federal law, state law continues in effect. Check with your state League as to whether your state law differs from the requirements under NCUA Part 707.

Model clauses and sample forms

NCUA published its own model clauses and sample forms for compli-ance with the Truth In Savings regula-tions. According to NCUA’s commen-tary, credit unions providing disclosures properly using the model clauses will be deemed in compliance with applicable disclosure rules. The forms are similar to the FRB model forms with numerous modifications to address specific credit union issues.

Administrative enforcement

Compliance by all credit unions will be enforced by the National Credit Union Administration. TISA was amend-ed to repeal the civil liability provisions, effective September 30, 2001. Thus, TISA does not contain a private right of action.

Record retention

Credit unions are required to retain evidence of compliance with this regula-tion for at least two years after the date disclosures are required to be made. Credit unions must retain copies of all the disclosures, notices, and advertising copy (including the text of advertise-ments conveyed by electronic and broad-cast media) to evidence compliance. To meet the record retention requirements of NCUA’s rules, credit unions need not retain copies of each disclosure provided

Credit unions should take extreme care in using NCUA model clauses and forms. The incorrect use of provisions or the inclusion of incorrect or irrelevant contract provisions may create liability rather than protect a credit union.



to a member but must demonstrate they have established and maintained pro-cedures for providing proper disclosures and notices when required. Sample dis-closures, notices, and advertising copy should be retained. Credit unions need not retain periodic statements or logs of rate inquiries or disclosure requests. Records may be stored by use of micro-fiche, microfilm, magnetic tape, or other methods capable of retaining and repro-ducing information.



Appendix 1–A

Truth In Savings Disclosure for Savings and Checking Accounts



© CU

NA M

utual

Grou

p 200

8 -10

All R

ights

Rese

rved

FORM

# (D3

7002

/D30

002)

-e

TRU

TH-IN

-SA

VIN

GS

DIS

CLO

SUR

E LA

ST D

IVID

END

DEC

LAR

ATI

ON

DA

TE:

The

rate

s, fe

es a

nd te

rms

appl

icab

le to

you

r acc

ount

at t

he C

redi

t Uni

on a

re p

rovi

ded

in th

is T

ruth

-in-S

avin

gs D

iscl

osur

e. T

he C

redi

t Uni

on m

ay o

ffer o

ther

rate

s fo

r the

se a

ccou

nts

from

tim

e to

tim

e.

RA

TE S

CH

EDU

LE

AC

CO

UN

T TY

PE

DIV

IDEN

DS

BA

LAN

CE

REQ

UIR

EMEN

TS

AC

CO

UN

T LI

MIT

ATI

ON

S

D

ivid

end

Rat

e/

Ann

ual

Perc

enta

ge Y

ield

(A

PY)

Div

iden

ds

Com

poun

ded

Div

iden

ds

Cre

dite

d D

ivid

end

Perio

d M

inim

um

Ope

ning

D

epos

it

Min

imum

B

alan

ce to

A

void

a

Serv

ice

Fee

Min

imum

B

alan

ce to

Ea

rn th

e St

ated

APY

Bal

ance

M

etho

d Se

e Se

ctio

n 6

Acc

ount

Nam

es H

ER

E

/

IN

SE

RT

INS

ER

T IN

SE

RT

INS

ER

T IN

SE

RT

INS

ER

T IN

SE

RT

INS

ER

T

/

/

/

/

/

AC

CO

UN

T D

ISC

LOSU

RES

Exce

pt

as

spec

ifica

lly

desc

ribed

, th

e fo

llow

ing

disc

losu

res

appl

y to

all

of th

e ac

coun

ts. A

ll ac

coun

ts

desc

ribed

in

this

Tru

th-In

-Sav

ings

Dis

clos

ure

are

shar

e ac

coun

ts.



© CU

NA M

utual

Grou

p 200

7 All R

ights

Rese

rved

FOR

M# (D

3050

19)-e

TRU

TH-IN

-SA

VIN

GS

DIS

CLO

SUR

E LA

ST D

IVID

END

DEC

LAR

ATI

ON

DA

TE/E

FFEC

TIVE

DA

TE:

The

rate

s, fe

es a

nd te

rms

appl

icab

le to

you

r acc

ount

at t

he C

redi

t Uni

on a

re p

rovi

ded

in th

is T

ruth

-in-S

avin

gs D

iscl

osur

e. T

he C

redi

t Uni

on m

ay o

ffer o

ther

rate

s fo

r the

se a

ccou

nts

from

tim

e to

tim

e.

RA

TE S

CH

EDU

LE

AC

CO

UN

T TY

PE

DIV

IDEN

DS

BA

LAN

CE

REQ

UIR

EMEN

TS

AC

CO

UN

T LI

MIT

ATI

ON

S

In

tere

st R

ate/

A

nnua

l Per

cent

age

Yiel

d (A

PY)

Inte

rest

C

ompo

unde

d In

tere

st C

redi

ted

Min

imum

O

peni

ng

Dep

osit

Min

imum

B

alan

ce to

A

void

a

Serv

ice

Fee

Min

imum

B

alan

ce to

Ea

rn th

e St

ated

APY

B

alan

ce M

etho

d Se

e Se

ctio

n 6

Acc

ount

Nam

es H

ER

E

/

IN

SE

RT

INS

ER

T IN

SE

RT

INS

ER

T IN

SE

RT

INS

ER

T IN

SE

RT

/

/

AC

CO

UN

T D

ISC

LOSU

RES

Exce

pt

as

spec

ifica

lly

desc

ribed

, th

e fo

llow

ing

disc

losu

res

appl

y to

all

of th

e ac

coun

ts.

FE

E SC

HED

ULE

EXA

MPL

E SH

AR

E A

CC

OU

NT

FEES

Dor

man

t

$ 2.

00/M

onth

A

ccou

nt in

activ

e fo

r one

(1)

year

and

bal

ance

is le

ss

than

$10

0.00

Acc

ount

Clo

sure

$1

0.00

/If a

ccou

nt c

lose

d w

ithin

(3) t

hree

mon

ths

New

Mem

bers

hip

Fee

$5.0

0/O

ne ti

me

fee

Non

-Bun

dle

Fee

$25.

00*

*one

tim

e fe

e im

pose

d if

mem

ber d

oes

not e

lect

“New

A

ccou

nt B

undl

e” w

hen

join

ing

the

cred

it un

ion.

The

New

A

ccou

nt B

undl

e in

clud

es R

egul

ar S

hare

Acc

ount

s; a

ny ty

pe

of C

heck

ing

acco

unt;

Deb

it C

ard;

and

Hom

eban

king

or

Voi

celin

e.

HO

LID

AY

CLU

B A

CC

OU

NT

FEES

E

arly

With

draw

al

$5.0

0/W

ithdr

awal

M

ON

EY M

AR

KET

AN

D P

REM

IUM

MO

NEY

M

AR

KET

AC

CO

UN

T FE

ES

Low

Bal

ance

$2

.00/

Mon

th

If m

inim

um a

vera

ge d

aily

ba

lanc

e no

t met

With

draw

al

$5.0

0/W

ithdr

awal

In

exc

ess

of fo

ur (4

) per

m

onth

MEM

BER

S SE

LEC

T SH

AR

E D

RA

FT

AC

CO

UN

T FE

ES

Low

Bal

ance

$2

5.00

/Mon

th

If m

inim

um a

vera

ge d

aily

ba

lanc

e is

not

met

SH

AR

E D

RA

FT/IN

FIN

ITY

DR

AFT

AC

CO

UN

T FE

ES

Cou

rtesy

Pay

$

29.0

0/Ite

m

Cou

rtesy

Pay

cov

erag

e at

C

redi

t Uni

on d

iscr

etio

n N

SF

$29.

00/It

em

Sto

p P

aym

ent

$15.

00/It

em

Ove

rdra

ft Tr

ansf

er

$10.

00/It

em

Che

ck C

opy

$5.0

0/Ite

m

Che

ck P

rintin

g

Pric

es m

ay v

ary

depe

ndin

g up

on s

tyle

~ In

finity

C

heck

ing

will

rece

ive

reim

burs

emen

t for

one

box

of

sta

ndar

d ch

ecks

per

or

der

Infin

ity S

hare

Dra

ft C

heck

ing

$5.0

0/M

onth

~

Prim

ary

Ow

ner A

ge 5

0 or

ol

der $

4.00

/Mon

th

OTH

ER S

ERVI

CE

FESS

W

ire T

rans

fer (

Inco

min

g)

$10.

00/T

rans

fer

Wire

Tra

nsfe

r (O

utgo

ing)

$1

6.50

/Tra

nsfe

r Fo

reig

n W

ire

$40.

00/T

rans

fer

Mon

ey O

rder

$2

.00/

Mon

ey O

rder

Tr

avel

ers

Che

ck fo

r Tw

o $1

.50/

$100

.00

Acc

ount

Rec

onci

liatio

n $1

5.00

/Hou

r A

ccou

nt R

esea

rch

$15.

00/H

our

Sta

tem

ent C

opy

$5.0

0/C

opy

Acc

ount

Act

ivity

Prin

tout

$2

.00/

Prin

tout

D

epos

ited

Item

Ret

urn

$15.

00/It

em

Lega

l Pro

cess

$2

5.00

Te

leph

one

Tran

sfer

(n

ot a

udio

resp

onse

or A

TM)

$2.0

0/Tr

ansf

er

Tele

phon

e C

heck

With

draw

al

$1.0

0/C

heck

R

eg D

$3

.00/

Tran

sact

ion

Offi

cial

Che

ck C

opy

$5.0

0/Ite

m

Che

ck P

ayab

le T

hird

Par

ty

$2.0

0/C

heck

A

mer

ican

Exp

ress

Gift

Che

ck

$2.0

0/C

heck

R

etur

n M

ail

$5.0

0/Ite

m

Fore

ign

Item

(plu

s co

rres

pond

ent f

ee)

$5.0

0/Ite

m

Bul

k C

oin

3% fo

r coi

n ov

er

$200

.00.

Doe

s no

t app

ly to

K

ids

Clu

b E

sche

at

$10.

00

Offi

cial

Che

ck S

top

Pay

men

t $1

5.00

/Item

SH

AR

E VA

LUE

Par

Val

ue o

f One

Sha

re

$ 5.

00

The

rate

s ap

pear

ing

in th

is S

ched

ule

are

accu

rate

as

of th

e E

ffect

ive

Dat

e in

dica

ted

on th

is T

ruth

-in-S

avin

gs D

iscl

osur

e.

If yo

u ha

ve a

ny q

uest

ions

or r

equi

re c

urre

nt ra

te a

nd fe

e in

form

atio

n on

you

/r ac

coun

ts, p

leas

e ca

ll th

e C

redi

t Uni

on.



Appendix 1-B

Truth In Savings Disclosure for Term Share/Certificate Accounts



© CU

NA M

utual

Grou

p 199

3, 20

07 A

ll Righ

ts Re

serve

d F

ORM#

(D31

001/D

3800

)-e

TRU

TH-IN

-SA

VIN

GS

DIS

CLO

SUR

E EF

FEC

TIVE

DA

TE:

M

ATU

RIT

Y D

ATE

:

Th

e ra

tes,

fees

and

term

s ap

plic

able

to y

our a

ccou

nt a

t the

Cre

dit U

nion

are

pro

vide

d in

this

Tru

th-in

-Sav

ings

Dis

clos

ure.

The

Cre

dit U

nion

may

offe

r oth

er ra

tes

for t

hese

acc

ount

s fro

m ti

me

to ti

me.

RA

TE S

CH

EDU

LE

Div

iden

d R

ate

(%

)

Ann

ual

Perc

enta

ge

Yiel

d (A

PY) %

R

ate

Type

M

inim

um

Ope

ning

D

epos

it D

ivid

ends

C

ompo

unde

d D

ivid

ends

C

redi

ted

Div

iden

d Pe

riod

Add

ition

al

Dep

osits

W

ithdr

awal

s R

enew

able

Acc

ount

Nam

e H

ere

TER

M G

OE

S H

ER

E

INS

ER

T IN

SE

RT

INS

ER

T IN

SE

RT

INS

ER

T IN

SE

RT

INS

ER

T IN

SE

RT

AC

CO

UN

T D

ISC

LOSU

RES

Exce

pt

as

spec

ifica

lly

desc

ribed

, th

e fo

llow

ing

disc

losu

res

appl

y to

all

of th

e ac

coun

ts.

All

acco

unts

de

scrib

ed

in

this

Tr

uth-

in-S

avin

gs

Dis

clos

ure

are

shar

e ac

coun

ts.



Appendix 1-C

Account Renewal Notice



RENEWAL NOTICE

CUNA Mutual Group, 1993, 2006

ACCOUNT OWNER(S) MAILING NAME AND ADDRESS:

D34001 Rev.4/06

TRUTH-IN-SAVINGS DISCLOSURES

Maturity Date:Grace Period: daysNew Maturity Date:

Change in Account Terms (if applicable):

Member No:

1. Maturity. Your account w ill mature on the maturity date set forth above.

2. Grace Period. If indicated above, after maturity your account provides a grace period w ithinw hich you may w ithdraw or transfer account funds w ithout penalty.

3. Account Renew al. Unless you w ithdraw or transfer the account funds at maturity or w ithinthe grace period, if applicable, your account w ill automatically renew for an addit ional term, andthe new maturity date is set forth above. The terms and condit ions applicable to your renew alaccount (except Dividend Rate and Annual Percentage Yield) w ill be the original account termsand condit ions unless indicated above or as set forth in the Truth-in-Savings Disclosureaccompanying this Renew al Notice.

4. Rate Information. The Dividend Rate and Annual Percentage Yield that w ill apply to youraccount, if renew ed, have not yet been determined. This rate information w ill be available fromthe credit union on the maturity date. You may call the credit union at the telephone number setforth above for current rate information on your account or if you have any instruct ions orquestions related to your account.

This Renew al Notice informs you of the renew al of your account w ith the credit union pursuantto the terms of the Membership and Account Agreement, Account Card, any applicable AccountChange Card(s), and current Truth-in-Savings Disclosure.



Appendix 1-D

Account Maturity Notice

CUNA Mutual Group, 1993, 2006

MATURITY NOTICE

Dear Member:


Your Account No. w ill mature on , and w ill not automatically renew . Torenew , contact the credit union and request an account renew al.

Upon the maturity date, dividends w ill w ill not be paid after the maturity date. Unlessrenew ed, the account balance w ill be paid in accordance w ith your previous paymentinstruct ions.

Please call us if you have questions about your account.

D33001 Rev.4/06



Truth In Savings / NCUA Part 707

Quiz/Study Guide

1. When opening a joint share account, should the account disclosures be given to each joint member, or is it sufficient to give the disclosures to one of the members?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

2. Name the five different points in the life cycle of a deposit account where TIS imposes special disclosure requirements.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

3. The initial account disclosures must include eight categories of information. List four of those categories.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

4. Define the term “dividends.”

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



5. What TISA disclosure is required in all oral rate disclosures, account disclosures, and advertisements for deposit accounts?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

6. TIS defines the exact form the dividend rate must be in for all disclosures and advertisements. What is that form?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

7. Explain the difference between the Annual Percentage Yield (APY) and the Annual Percentage Yield Earned (APYE).

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

8. List the two methods of dividend calculation allowed by TIS and briefly describe how each one works.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

9. The dividend nonpayment rules outline four instances when credit unions are not required to pay dividends. List three of them.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



10. Does NCUA mandate a particular frequency for compounding and crediting dividends?

_____________________________________________________________________

_____________________________________________________________________

11. If your credit union provides TIS account disclosures electronically, the member must first provide their affirmative consent to receive electronic disclosures. Before the credit union accepts that consent, the member must receive a written disclosure containing specific information. What two pieces of information must be included in that disclosure?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

12. If members can open accounts online, at what point in that process must they receive the TIS account disclosures?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

13. Name the four major items TIS requires on periodic statements.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

14. When is a change in terms notice required?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



15. If an advertisement mentions an APY, what other disclosures must be shown clearly and conspicuously?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

16. When opening a term share account, what is the correct APY and dividend rate that must be quoted to the member?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

17. There are four types of balance disclosures that must be included in the account disclosures. One of those is the minimum balance required to open the account, avoid a fee, and obtain the disclosed APY. What are the other three required balance disclosures?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

18. All credit unions must disclose on periodic statements a total dollar amount for all ___________________ and ___________________ fees imposed on a member’s account for the ____________________ and ____________________.

19. What does NCUA’s Part 707 prohibit the credit union from displaying on an ATM screen, website, or telephone response system?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



Truth In Savings/NCUA Part 707

Answer Key

1. The account disclosures can be given to any one of the accountholders. (Page 1-8)

2. Preaccount opening, account opening, periodic statements, changes in account terms and account maturity, and advertising. (Page 1-2)

3. Initial account disclosures should include: (1) APY and dividend rate, (2) compounding and crediting policies, (3) balance information, (4) fees, (5) transaction limitations, (6) nature of dividends, (7) features of term share accounts, and 8) bonuses. (Pages 1-10 to 1-13)

4. Dividends — declared or prospective earnings on a member’s shares in a credit union to be paid to a member or a member’s account excluding bonuses, extraordinary dividends, or similar incentives. (Page 1-4)

5. The “annual percentage yield.” (Page 1-5)

6. It must be rounded to the nearest basis point (.01) and disclosed to two decimal places (4.55%). (Page 1-5)

7. Annual Percentage Yield (APY) — the percentage rate reflecting the total amount of dividends paid on an account based on the dividend rate and the frequency of compounding for a 365-day period for share and share draft accounts or for the term of the account for term share accounts. The APY assumes the principal amount remains in the account for 365 days or the term of the account. (Page 1-5)

Annual Percentage Yield Earned (APYE) — reflects the total amount of dividends actually earned for the dividend or statement period as a percent of the actual average daily balance in the account. The APYE is affected by additions and withdrawals during the period and is required for periodic statements only. (Page 1-5)

8. Daily balance method — a daily periodic rate is applied to the exact daily balance in the account for each day. (Page 1-6)

Average daily balance method — the balance for each day is added together, this figure is divided by the number of days in the period, and the periodic rate is applied to this figure. (Page 1-6)



9. During the grace period of a rollover term share account, after maturity for a nonrollover term share account, funds remaining in a closed account, and the time period during which checks are returned unpaid. (Pages 1-7)

10. No, they only require that the frequency be stated in the account disclosures. (Page 1-7)

11. The disclosure must inform members of their rights as they relate to electronic disclosures and provide the hardware and software requirements for accessing and retaining the disclosures. (Page 1-25)

12. The member must be required to access the account disclosure before the account is opened or the services are provided, whichever is earlier. (Page 1-9)

13. The Annual Percentage Yield Earned, the amount of dividends/interest earned, any fees imposed, and the number of days in the period. (Pages 1-14)

14. Affected members must be sent a change in terms notice whenever there will be a change in any terms required in the initial TISA account disclosure if that change may reduce the APY or adversely affect the member. The notice must be mailed 30 days before the change goes into effect. (Page 1-19)

15. Variable rate accounts — the fact that the rate may change after the account is opened.

Time the APY is available — 1) for dividend-bearing accounts except term share accounts, a statement that the APY is accurate as of the last dividend declaration date or that the disclosed prospective APY is accurate or 2) for interest-bearing accounts and dividend-bearing term share accounts, the period the APY is offered for that account or a statement that the APY is accurate as of a specified date.

Minimum balance required to obtain the advertised APY.

Minimum opening deposit if it is greater than the minimum balance necessary to obtain the advertised APY.

Effect of fees — a statement that “fees could reduce earnings if maintenance or activity fees could be imposed that would reduce earnings.

Features of term share accounts — the term of the account and a statement that a penalty will or may be imposed for early withdrawal. (Page 1-22 to 1-23)



16. The rate and the APY that is being offered that day must be disclosed to the member. (Page 1-10)

17. The other balance disclosures are: 1) the balance computation method used to figure dividends, 2) an explanation of how the minimum balance is determined, and 3) the membership share par value. (Page 1-11)

18. All credit unions must disclose on periodic statements a total dollar amount for all overdraft fees and returned item (NSF) fees imposed on a member’s account for the statement period and for the calendar year-to-date. (Page 1-16)

19. When displaying available balance information on an ATM screen, website or telephone response system, NCUA’s Part 707 prohibits a credit union from including any additional amounts that may be provided through overdraft protection plans, lines of credit, or through transfers from other accounts. (Page 1-18)


SECTION 2 – REGULATION D RESERVE REQUIREMENTS

OF DEPOSITORY INSTITUTIONS


Background

The primary purpose of the Federal Reserve Board (FRB) Regulation D (12 CFR §204) is to set rules for mon-etary reserves that must be maintained directly or indirectly with the Federal Reserve System. Regulation D deals with three issues affecting insured credit unions.

First, it may require maintaining reserve accounts. Normally smaller cred-it unions are exempt or can meet the monetary reserve requirements through vault cash. For smaller credit unions that must maintain reserve accounts under Regulation D, the simplest method is usually a “pass-through” account with a larger credit union. A “pass-through” account is an account held by a cor-respondent institution which includes the reserve balance held by the respon-dent and correspondent institutions at a Federal Reserve Bank. The corre-spondent institution, which may be the NCUA Central Liquidity Fund or other credit unions or banks placing the funds with a Federal Reserve Bank on behalf of a respondent credit union, is responsible for reserve account maintenance.

Second, Regulation D affects how credit unions define certain charac-teristics of deposit accounts since the characteristics of an account determine whether the credit union must reserve for the account. For example, a credit union normally limits certain types of savings accounts to six transactions

monthly to avoid having to reserve on that account as if it were a transac-tion account, which may be subject to reserves.

Third, Regulation D requires credit unions to impose certain penalties for early withdrawal from time deposit accounts.

This discussion only deals with the three aspects of Regulation D identi-fied above focusing primarily upon monetary reserves. There are other aspects of Regulation D that affect international transactions by very large credit unions that are outside the scope of this program. For more information on those transactions, see Regulation D §204.2(h). Also, Regulation D only covers monetary reserves required by the FRB as part of its control of mon-etary policy. These reserves should not be confused with loan loss reserves designed to protect credit unions against losses from uncollectable loans.

Monetary Reserve Requirements

Regulation D affects all credit unions. The reserves are one tool used by the FRB to monitor and control monetary policy. The rules primarily focus on transaction accounts (such as checking, NOW, and share draft accounts), and they turn upon both the size of the credit union and the nature of its accounts. All credit unions with at least $12.4 million

Section 2 – Regulation D Reserve Requirements of Depository Institutions


SECTION 2 – REGULATION D RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS

in deposits are subject to Regulation D. A corporate credit union can become exempt if it does not do business with the general public, is owned by the credit unions it serves, and is organized solely to do business with other credit unions. Through agreements with the FRB, such institutions can hold reserves for other credit unions under “pass-through” accounts.

Interest on Reserve Deposits

The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying inter-est on balances held by or on behalf of depository institutions beginning October 1, 2011. The Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.

Therefore, the Federal Reserve Board (FRB) amended Regulation D to direct the Federal Reserve Banks to pay inter-est on required reserve balances (bal-ances held to satisfy depository insti-tutions’ reserve requirements) and on excess balances (balance held in excess of required reserve balances and clear-ing balances.

The interest rate paid on required reserve balances will be the average targeted federal funds rate established by the Federal Open Market Committee over each reserve maintenance period.

The rate paid on excess balances will be equal to the lowest targeted federal funds rate for each reserve maintenance period.

In May 2009, the Federal Reserve Board approved final amendments to

Regulation D to authorize the establish-ment of excess balance accounts at Federal Reserve Banks. Excess balance accounts are limited-purpose accounts for maintaining excess balances of one or more institutions that are eligible to earn interest on their Federal Reserve balances. Each participant in an excess balance account will designate an insti-tution to act as agent (which may be the participant’s current pass-through corre-spondent) for purposes of managing the account.

Excess balance accounts were avail-able for the reserve maintenance period beginning July 2, 2009.

Filing Reports

No matter where a credit union maintains its reserves, the Regulation D report must be filed with the Federal Reserve. The report is to be filed on one of the FR2900 series reports, and the specific instructions are crucial to follow for each of the reports. The report should be filed with the Federal Reserve Bank covering the main office of the credit union. Copies of these reports can be found in the Appendices to this section.

If a credit union has less than $15.5 million in total deposits, it is not subject to the reserve reporting requirements (so long as its deposits can be estimated from other sources). If it has more than $15.5 million in total deposits, the reporting requirements are set forth in the following table, figure 2.1. These numbers are adjusted by the FRB annu-ally.



Computation and Maintenance Periods

As indicated in figure 2.1, “Credit Union Reporting Requirements,” the time periods applicable to the reserve reports are fairly complex. If a credit union is required to make a report, it is important to recognize that manipulating figures or failing to make the report at all can result in much stricter reporting requirements. While there are no specif-ic record retention period requirements, credit unions are required to maintain their reporting records and make them available for regulatory examination.

Weekly reporting

For credit unions that file weekly, the reserve requirements are computed on

the basis of daily average deposit bal-ances and Eurocurrency liabilities dur-ing a 14-day period ending every second Monday per 12 CFR §204.3(c). This is known as the computation period. Reserve requirements are computed by applying the reserve ratios to the vari-ous types of deposits and Eurocurrency liabilities of the institution. The required reserve balance must then be main-tained during the 14-day period which begins on the third Thursday and ends following the end of a given computation period. This is known as the mainte-nance period. Reserve requirements for the maintenance period (the time during which a particular level of reserves must be maintained) are based on the com-putation period that ended immediately prior to the maintenance period. Vault cash is also calculated based upon the average held during the computation period that ended three days prior to the maintenance period. The vault cash amount is credited against the amount that must be maintained in a reserve account during the maintenance period.

Quarterly reporting

For credit unions that report quarterly, the computation period is based on a 7-day period that begins on the third Tuesday of March, June, September, and December per 12 CFR §204.3(d). The maintenance period begins on the fourth Thursday following the end of the credit union’s next computation period. Vault cash held during the computation period is credited against the amount to be maintained in a reserve account dur-ing the following maintenance period.

Figure 2.1 Credit Union Reporting Requirements Frequency Reservable and Report Reserve Deposits Liabilities* Number or Not

less than or N/A None No equal to $15.5M

more than $15.5M less than or Annual But less than equal to $15.5M (FR2910a) No $1.989 billion

$1.989 billion Less than or Weekly or more equal to $15.5M (FR2900) No

less than $436.2M more than $15.5M Quarterly (FR2900) Yes

$436.2M or more more than $15.5M Weekly (FR2900) Yes

* Reservable liabilities include transaction accounts, nonpersonal time deposits, and all net balances, loans, assets, and obligations that are subject to reserve requirements.

EXEMPT CREDIT UNIONS

NON- EXEMPT CREDIT UNIONS



Calculating Reservable Liabilities and Required Reserves

The term “deposits,” as used in figure 2.1, is consistent with the definition of deposits used in generally accepted accounting principles. It refers to the total deposits of any type at a credit union as of the computation date. The determination of reservable liabilities is based on rules set forth by the Federal Reserve and is significantly more com-plex. There are three types of accounts that may generate reserves: transac-tion accounts (such as share draft accounts), nonpersonal time deposits (such as corporate share accounts), and Eurocurrency deposits. Credit unions rarely hold any form of Eurocurrency liabilities. Eurocurrency liabilities are defined under §204.2(b) and involve a calculation of balances due to a non-United States office.

The reservable liabilities are calculated based on the transaction accounts, non-personal time deposits, and Eurocurrency accounts that a credit union holds. Since December 1992, “teller’s checks” have been included in the computation of a credit union’s transaction accounts. A teller’s check is one drawn by the credit union against its own account with anoth-er depository institution. Thus, any check drawn against the credit union’s account with another institution is counted as a transaction account from the date it is drawn until the date it is paid. The first $15.5 million of transaction accounts is exempt. (As with the table in figure 2.1, that figure is adjusted annually. The $15.5 million figure applies in 2017.)

The amount a credit union must maintain in reserves depends on the mix of its deposits. For transaction accounts such as share draft accounts, the general reserve requirement is 3% for reservable transaction accounts from $15.5 to $115.1 million, and is $2.988 million (including the adjustment for the $15.5 million exemption amount) plus 10% of net transaction accounts over $115.1 million for credit unions that have net reservable transaction accounts over $115.1 million. For nonpersonal time deposits such as corporate share accounts, the reserve requirement is now 0%. If a credit union holds Eurocurrency liabilities, the reserve percentage is also 0%. Once again, it is crucial to remem-ber that these figures are adjusted annu-ally by the FRB and the figures above are applicable to 2017.

To explain how the reservable calculations are made, assume a credit union has $17.4 million in total deposits, $17 million in share draft accounts, and $400,000 in one-year corporate share accounts. Also assume the credit union has no other accounts subject to reserve and holds $50,000 in vault cash. Under this example, the reserve requirements would work as follows: The credit union would first apply the $15.5 million in exempted reservable liabilities to the share draft accounts, leaving $1.5 million ($17 million − $15.5 million = $1.5 million) of share draft accounts to reserve against. The corporate share certificates (which are nonpersonal time deposits) are subject to a 0% reserve requirement. That leaves a nonexempt reservable liability of $1.5 million. Applying 3% to $1.5 million yields a reserve



requirement of $45,000 for the credit union. The reserve requirement can be met first from vault cash, and only then is an actual reserve account required. Since we assumed that the credit union had $50,000 in vault cash, the credit union actually has no additional reserve requirement beyond its vault cash, and even has $5,000 to spare.

While the specific calculations can be complex, the FRB does the calcula-tion for each credit union and notifies the credit union of the reserve amount required.

Establishing a Reserve Account

Reserves can be held essentially in three ways: vault cash, a balance main-tained directly with a Federal Reserve Bank, or in a pass-through account. If a credit union has enough vault cash to meet its reserve requirements, no other account is needed. For smaller credit unions, it is likely that the sim-plest approach when a reserve account is required is a pass-through account. As noted earlier, however, the fact that reserves are maintained at a pass-through institution does not change the reporting requirement. The report still must be sent directly to the Federal Reserve Bank. The Federal Reserve provides notice of the amount of reserves that must be main-tained for each credit union.

Characteristics of Accounts

To determine whether an account is a transaction account or a nonpersonal time deposit requires extensive analy-sis of the definitions in Regulation D. Those definitions cover a variety of terms and result in a complex set of criteria. Fortunately, for most credit unions the major categories are clear. As a general matter, credit union accounts are divid-ed into three categories:

1. Transaction accounts (such as share draft, checking, and NOW accounts)

2. Savings deposits (such as regular share and money market accounts)

3. Time deposits (such as term share or cer-tificate accounts)

The reserve requirements cover all transaction accounts and “nonpersonal time deposits,” but do not apply to sav-ings deposits or to those time deposits that are treated as “personal time depos-its” per 12 CFR §204.9. Consequently, it is beneficial for credit unions to struc-ture their accounts to the extent possible so that they fall within the categories of savings deposits or personal time depos-its. However, even though the reserve requirements may not apply to certain types of accounts, Regulation D may still require the imposition of early withdraw-al penalties.

Transaction accounts

A transaction account includes any type of checking, NOW (negotiable order of withdrawal), share draft account, or savings account which does not include



the required withdrawal restrictions for a savings deposit. The critical aspect in defining transaction accounts and sav-ings deposits is to focus on the savings account limitations and abide by them. If a credit union by contract or prac-tice allows its member to exceed those limitations, then the account would be treated as a transaction account subject to reserves. It is important to recognize that this treatment would apply not only to the particular members who exceed the transaction limits but to all accounts of the same type. Therefore, by allowing more than the permissible number of transfers from some accounts within a class of savings accounts, a credit union risks having its entire class of savings accounts treated as transaction accounts rather than savings accounts, resulting in significant reserve requirements. If a credit union has procedures and con-tractual limitations in place to enforce these limitations and one account inad-vertently has transactions exceeding the limits, such violation would not jeopar-dize an entire class.

To ensure that no more than the per-mitted number of withdrawals or trans-fers are made from a “savings deposit,” a credit union must either:

• Prevent withdrawals or transfers that would exceed the transfer limitations or

• Adopt procedures to monitor those transfers after the fact, and contact those customers who exceed the trans-fer limitations on more than an occa-sional basis. If the practice continues on more than an occasional basis, the credit union must close the account or take away its transfer capabilities.

Savings deposits and money market deposit accounts

A savings deposit is an account in which the credit union has the right to require seven days written notice before withdrawal, although notice is not required by the deposit contract itself per 12 CFR §204.2(d)(1). In addition, a savings deposit may not have a specified date or time after which it is payable. Savings deposits expressly include regu-lar share accounts and money market deposit accounts. The most important use of the definition of savings deposits is to differentiate them from transaction accounts. A savings deposit becomes a transaction account if the credit union permits (by contract or practice) more than six preauthorized, automatic, or telephonic transfers (including transfers through audio response and PC/home banking systems) per month to another account of the customer or to a third party. The six transfers expressly include any other transfers to other accounts at the credit union. (If the credit union does not cycle its transactions on a cal-endar month, a different cycle is permit-ted so long as it includes at least four weeks. For example, a credit union could test the transactions from the 15th of one month to the 14th of the next month.) A loan payment to the credit union from the account is not counted as part of the six transactions. A member may not use multiple accounts to evade the transfer limitations.

The following transfers or withdraw-als do not count toward the six-transfer limitation imposed on savings accounts and MMDAs:

• transfers for the purposes of repaying



loans and associated expenses at the same depository institution

• withdrawals or transfers among accounts of the same person at the same credit union, when made by mail, messenger, ATM, or in person

• withdrawals made by a telephone instruction that result in a check being mailed to the member

Time deposits

The definition of time deposits includes share certificate accounts and special accounts such as Christmas clubs and vacation accounts so long as the account is maintained for a term of at least three months and even if the last deposit is made within seven days of withdrawal. Regulation D does not define a “Christmas Club Account,” as the features of such an account may vary from credit union to credit union. Most credit union Christmas Club accounts are savings accounts in that there is no maturity date and funds may be withdrawn in the first seven days without penalty. However, under Regulation D §202.2(c)(1), the term “time deposit” includes “club” accounts (such as Christmas Club or Vacation Club accounts that are not maintained as “savings deposits”) deposited under written contracts providing that no with-drawal shall be made until a certain number of periodic deposits have been made during a period of not less than three months.

A time deposit is a “nonpersonal time deposit” if it is owned by other than a natural person — for example, a time deposit owned by a corporate member.

While an IRA or deferred compensa-tion account has a trustee or custodian, these accounts are treated as personal time deposits.

In addition, any time deposit owned by a natural person becomes a non-personal time deposit if it is transfer-able. It is therefore crucial to label all time deposits with the term “non-transferable” to avoid this result. The key here is labeling the account as not transferable. It is still deemed not transferable even though the account can be pledged as collateral for a loan. Moreover, the fact that transfers can result because of death, incompetency, marriage, divorce, attachment, or other process of law, or otherwise on the books and records of the credit union, does not make the account transferable under the terms of this definition. The test is really one of labeling more than it is one of substance. It is therefore crucial for credit unions to label the certificate, instrument, passbook, state-ment, or other evidence of the account with the term “not transferable” or “nontransferable.” The key is to make sure that the most significant evidence of the account is labeled. For example, if there is a certificate evidencing the account, then this is likely the most significant evidence of the account and the certificate is the item that should be labeled. If the credit union does not issue a certificate but provides statements showing the amount in the account, then it would be crucial to use the term “not transferable” on the statements. There is no risk of labeling too many items as not transferable, but there is risk of not having hit the key item. Consequently, the best approach



is to label all evidence of the account as not transferable.

Early withdrawal penalties

Time deposits must include certain early withdrawal provisions in order to avoid having the time deposits charac-terized as transaction accounts. At a minimum, early withdrawal penalties of at least seven days’ interest upon a with-drawal of a time deposit in the first six days of the account are required. If the account is a nonpersonal time deposit (such as a corporate savings account) with a maturity of 1½ years or more, however, the minimum penalty required is one month’s interest. If the penalty must be imposed, it is still required even if it involves invading the principal of the account to apply the penalty. This would occur, for example, if a member with-drew a time deposit during the first six days of the account.

A time deposit may be paid prior to maturity and without penalty in any of the following situations:

• When an owner of the deposit dies or is determined legally incompetent by a court or other body of competent juris-diction.

• Where the time deposit is an indi-vidual retirement account (IRA) and any portion is paid within seven (7) days after establishment; or where the time deposit is a Keogh Plan (Keogh), provided that the depositor forfeits an amount at least equal to the simple interest earned on the amount with-drawn; or where the time deposit is an IRA or Keogh and the owner attains age 59½ or becomes disabled.

• Where a time deposit is withdrawn within ten (10) days after a specified maturity date even though the deposit contract provides for automatic renew-al at the maturity date.

Credit unions may impose stricter penalties if they wish, but such penal-ties must be provided for in the deposit agreement.



Appendix 2–A

FR 2900 Report of Transaction Accounts, Other Deposits, and Vault Cash



Appendix 2–B

FR 2910a Annual Report of Total Deposits and Reservable Liabilities



Regulation D Reserve Requirements of Depository Institutions

Quiz/Study Guide

1. Describe the three ways Regulation D can affect your credit union.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

2. What accounts are the primary focus of Regulation D?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

3. List the three types of accounts that may generate reserve requirements.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

4. What are the three ways in which reserves may be held?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

5. Why is it important to abide by the six-transfer limit set for savings accounts?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



6. Under Regulation D, what account transactions are excluded from the six-transfer limit for savings deposit accounts?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

7. What is the minimum early withdrawal penalty required by Regulation D? Can this penalty ever be deducted from the principal balance?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



Regulation D Reserve Requirements of Depository Institutions

Answer Key

1. May require maintaining reserve accounts, may affect how you define certain characteristics of deposit accounts and requires you to impose certain penalties for early withdrawal from time deposit accounts. (Page 2-2)

2. Focuses primarily on transaction accounts. (Page 2-2)

3. Transaction accounts, nonpersonal time deposits, and Eurocurrency deposits. (Page 2-5)

4. Vault cash, a balance maintained directly with a Federal Reserve Bank, or a pass-through account. (Page 2-6)

5. If your credit union allows members to exceed the six-transfer limit, the account will be treated as a transaction account and be subject to reserve requirements. This would apply not only to the account in question but all accounts of the same type. (Page 2-7)

6. Transfers for loan payments at the same credit union, transfers, or withdrawals among accounts of the same person when made by mail, messenger, ATM, in person, or telephone withdrawals resulting in a check mailed to the member. (Page 2-8)

7. At least seven days interest for early withdrawal from a time deposit in the first six days of the account. For nonpersonal time deposits with a maturity of 1½ years or more, at least one month’s interest. (Page 2-9)

When a penalty must be imposed and the account earnings are less than the amount of the penalty, the principal can be invaded. (Page 2-9)


SECTION 3 – REGULATION E ELECTRONIC FUNDS TRANSFER


Purpose, Scope, and Exemptions

Purpose

The Electronic Funds Transfer Act (EFTA) was enacted in 1978 and became effective in May 1980. The act provides the basic framework of rights, liabilities, and responsibilities of the parties involved in an electronic funds transfer (EFT). Adopted in the wake of significant problems surrounding the early attempt to automate social security deposits, the legislation attempted to provide the ground rules for developing EFT technology.

Initially, coverage was aimed at auto-mated teller machines, telephone bill-payment services, point-of-sale transfers in stores, and preauthorized transfers to or from a consumer’s account (federal recurring payments like Social Security). By establishing a regulatory framework in advance of the technology, Congress was attempting to provide the degree of certainty needed to allow EFT develop-ment and experimentation while trusting the Federal Reserve Board (FRB) to exer-cise its discretion in drafting regulations that did not stifle that development.

Scope

Regulation E provides the definitions, exemptions from coverage, initial dis-closure requirements, change-in-terms requirements, rules for issuing an EFT

access device, transactional and peri-odic statement documentation require-ments, preauthorized transfer require-ments, and error resolution requirements for electronic funds transfers. Although patterned after the disclosure and error resolution format of Truth In Lending (Regulation Z), there are significant sub-stantive differences in the credit union’s and member’s rights and responsibilities under the two regulations.

An electronic funds transfer is any transfer of funds initiated through an electronic terminal, telephone, com-puter, or magnetic tape for the purpose of ordering, instructing, or authoriz-ing a credit union to debit or credit a share draft/checking, share/savings, or other member asset account. The term “account” incudes payroll accounts established by employers to deliver compensation to employees via EFT on a recurring basis. Additionally, an ACH (Automated Clearinghouse) transfer where a member has provided a check to allow a merchant to capture the routing, account, and serial numbers to initiate the transfer is also an electronic fund transfer. These transactions are called “electronic check conversions.” The term includes the following transactions:

• point-of-sale (POS) transfers

• automated teller machine (ATM) transfers

• direct deposit or withdrawal of funds

• telephone transfers

Section 3 – Regulation E: Electronic Funds Transfer



• transfers resulting from debit card transactions, whether or not initiated through an electronic terminal

• electronic check conversion

For electronic check conversions, the check can be retained by the member, the merchant or other payee, or the payee’s financial institution. In addition, a payment made by a bill payer under a bill-payment service that is available to a member via a computer or other elec-tronic means is also an electronic funds transfer. This is true unless the terms of the bill-payment service explicitly state that all payments must be made solely by check, draft, or similar paper instru-ment drawn on the member’s account.

Specifically excluded are payments initiated by check, draft, or other paper instruments like share drafts, includ-ing payments made at an electronic terminal by check, draft, or other paper instrument. For example, an electronic re-presentment of a returned check is not covered by Regulation E because the transaction originated by check. Regulation E does apply when members authorize a fee to be debited electroni-cally from an account when a check is returned due to insufficient funds. See Regulation E §1005.3(b) and (c)(1).

The term electronic terminal means an electronic device, other than a tele-phone operated by a member, through which a member may initiate an EFT. For instance, point-of-sale terminals, automated teller machines, and cash dispensing machines are covered. Machines that are “electronic termi-nals” must be able to provide a paper receipt for each transaction that meets the requirements of the regulation. It is

primarily for that reason telephones and personal computers are not considered electronic terminals.

An “access device” is a card, code, or other means a member may use to initiate an electronic funds transfer. For example, a PIN is an acceptable access device for an audio-response system. The term access device does not include a check or draft used to cap-ture the MICR (Magnetic Ink Character Recognition) encoding to initiate a one-time ACH debit. Even though the check is not an access device under Regulation E, the transaction is covered by the regulation. In order for a member to be held liable for his or her use of an access device it must be an “accepted” device. An access device becomes an accepted access device when the mem-ber to whom the device was issued: (1) requests and receives, or signs, uses, or authorizes another to use, the device in the manner intended; (2) requests vali-dation of an unsolicited access device; or (3) receives an access device that is a renewal or substitution for an accepted access device.

Exemptions

Regulation E provides important relief for credit unions through specific exemptions. Without this, many typi-cal credit union transactions affected by computer would be covered, and the compliance burden imposed — particu-larly on smaller credit unions — would far outweigh any possible benefit to credit union members.

• Check guarantee, wire transfers, commodities, and securities transac-tions. Any check guarantee or autho-



rization service that does not directly result in a debit or credit to a mem-ber’s asset account is not covered by the regulation. For instance, when a store calls the credit union and veri-fies that a share draft will be honored, an EFT does not occur as long as the credit union merely flags the mem-ber’s account for the amount speci-fied without actually transferring the funds. See Regulation E §1005.3(c)(2). Wire transfers using either the fed-eral reserve wire transfer system or a similar wire transfer system are exempt unless the wire transfer is an outgoing international wire, then it is subject to the remittance transfer portion of the Regulation E rules. For example, if a member sends a wire transfer from his or her credit union account to another domestic financial institution, the transaction is exempt. However, ACH transfers are covered. See Regulation E §1005.3(c)(3).

Transfers for the purchase or sale of a security or commodity are not covered if the security or commod-ity is: (1) regulated by the Securities and Exchange Commission (SEC) or Commodity Futures Trading Commission (CFTC), (2) purchased or sold through a dealer regulated by the SEC or CFTC, or (3) held in book-entry form by a Federal Reserve Bank or federal agency. See Regulation E §1005.3(c)(4).

• Certain automatic transfers. The exemption for automatic transfers minimizes the compliance burden on all credit unions and covers a host of relatively common transfers that had historically provided little problem for members. Under these exemptions,

any transfer made under an agree-ment between the member and the credit union that provides for a trans-fer, without specific request from the member, will be exempt if it is: (1) a transfer between a member’s accounts at the credit union (from share to share draft or to a joint account), (2) from the member’s account to the credit union (a loan payment), (3) into the member’s account (crediting a divi-dend), or (4) to another family mem-ber’s account at the credit union. See Regulation E §1005.3(c)(5).

• Certain telephone transfers. Credit unions have historically allowed members to call the credit union and request that funds be transferred between accounts or that a check be sent to the member. These transac-tions are exempted where the transfer of funds is (1) initiated by telephone and (2) not under a telephone bill-paying agreement or other prearranged plan or agreement for periodic or recurring transfers. See Regulation E §1005.3(c)(6). Generally, to be cov-ered, the agreement to make transfers must be a part of a specific written agreement covering the service.

Note: Even though telephone trans-fers may be exempt under Regulation E, such transfers are not exempt from the transaction limitations under the FRB’s Regulation D (12 CFR Part 204). Regulation D limits the num-ber of telephone transfers per month from a savings account. The National Automated Clearing House Association (NACHA) has rules for ACH transfers that mirror many of the Regulation E requirements. However, there are no exempt classes of ACH transactions.



• Preauthorized transfers to small financial institutions. There is a lim-ited exemption for preauthorized EFTs. Credit unions with less than $100 million in assets (as of the preceding December 31) do not have to comply with Regulation E for preauthorized transfers to or from their members’ accounts. Thus, most direct deposits, whether received from the federal gov-ernment or a private employer, are not covered by the regulation. However, other EFT services, such as ATM or telephone bill payment under a written plan or agreement, remain covered even when offered by a small credit union. See Regulation E §1005.3(c)(7).

General Disclosure Requirements

Regulation E imposes disclosure requirements on institutions when a consumer initially contracts for EFT ser-vices, initiates an EFT at an electronic terminal (ATM/Point-of-sale), on each periodic statement, and when there are any changes in the terms of the initial EFT agreement.

Regulation E disclosures must be clear and readily understandable, in writing, and in a form the consumer may keep. Credit unions may use com-monly accepted or readily understand-able abbreviations in complying with all the of regulation’s disclosure require-ments. Credit unions may also provide the disclosures in a language other than English as long as disclosures are made available in English upon the consum-er’s request.

Credit unions are permitted to deliver Regulation E disclosures to consumers in electronic form, subject to compliance with the consumer consent provisions of the Electronic Signatures in Global and National Commerce Act (ESIGN). Please note that ESIGN generally preempts state e-signature laws, except with regard to a state that has adopted the Uniform Electronic Transactions Act (UETA) as approved by the National Conference of Commissioners on Uniform State Laws (NCCUSL). So, be sure to check with your state league to see if UETA or ESIGN is the controlling statute in your state.

Disclosure of Initial Terms and Conditions

Initial disclosure delivery

The credit union is required to provide the initial Regulation E disclosures to members requesting an EFT service at the time the member contracts for the service or on or before the time they can first use the EFT service.

Content of initial disclosures

Regulation E requires disclosure of the initial terms and conditions for an electronic fund transfer service. These disclosures must be written in read-ily understandable terms, and can be provided in any language other than English, as long as the English version is available upon the member’s request. The rule includes model clauses that ensure compliance with the regulation. These clauses can be found in Appendix A to the regulation.

http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&SID=deff3b07df7b41c7563deb9f42e05244&rgn=div9&view=text&node=12:2.0.1.1.6.0.3.20.9&idno=12

http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&SID=deff3b07df7b41c7563deb9f42e05244&rgn=div9&view=text&node=12:2.0.1.1.6.0.3.20.9&idno=12



Consumer liability

A summary of the member’s liability under the EFT Act for unauthorized electronic funds transfers is required. The disclosure may also include a rec-ommendation that a loss or theft be reported promptly. This disclosure may not be used to increase the member’s responsibility beyond that provided in the law.

Note: For credit unions offering debit and POS cards through the Visa or MasterCard network, these networks have adopted liability standards more protective of the member than what is provided in Regulation E. Therefore, the applicable limitations may need to be incorporated in the disclosure.

Credit union telephone number and address

The credit union must disclose a tele-phone number and address the member may use to notify the credit union of a loss or theft of an access device or when an unauthorized use is suspected.

Credit union’s business days

The credit union must disclose the business days it is open to serve its members. These business days would not include times when only back-office functions are being performed. The disclosure is important since it affects the time within which the member must notify the credit union about a loss or theft of an access device to avoid addi-tional liability and the time the credit union has to correct unauthorized transfers.

Types of transfers and applicable limitations

The credit union must disclose the types of electronic funds transfer servic-es it is offering to the member under the agreement. Also, the credit union must disclose any limitations on the frequency or dollar amount of transfers permitted under the agreement. (For example, if a member can only receive up to $200 in ATM withdrawals in a day, such limita-tion must be disclosed.) Details on any limitations related to the security of the EFT system need not be disclosed if the confidentiality is essential to maintain the security of the credit union’s EFT system. For example, the credit union need not notify the member that limita-tions will not be in effect during periods when the system is offline.

When listing the types of permissible transfers, don’t forget to add electronic check conversions (ECK) to your initial Reg E disclosures if you haven’t done so already. The model disclosures include language that credit unions may use to inform members that they may allow a merchant or other payee to make a one-time payment from a checking account using information from a check to pay for purchases or to pay bills. See Appendix A-2.

Fees and charges

Any fees or charges the credit union imposes for electronic funds transfers or the right to make the transfers must be disclosed. If another financial institution charges a surcharge for conducting an EFT at an ATM, the financial institution owning or operating the ATM is responsi-ble for disclosing the surcharge fee prior



to the transfer.Note: A credit union imposing a sur-

charge at its ATMs must disclose its sur-charging policy at the ATM.

Member’s right to documentation

The credit union must disclose the member’s right to receive documenta-tion regarding EFTs, including docu-mentation at electronic terminals (for example receipts), on periodic state-ments, and on notices when preautho-rized credits are received or payments made.

Member’s right to stop payments

The credit union must disclose the member’s right to stop a preauthorized payment along with the procedure for stopping the payment by giving the credit union advance notice at least three business days before the sched-uled date of payment (other than an exempt payroll deduction loan pay-ment). A sample Loanliner® EFT Agreement and Disclosure form is included as Appendix 3-A to this section.

Note: Credit unions offering elec-tronic bill payment services through an audio response or PC service generally permit members to stop or cancel bill payments prior to transmission. These types of bill payments are generally not regarded as “preauthorized” payments subject to these stop payment rules. The credit union must carefully distinguish these services in its EFT agreement and disclosure.

Credit union liability for not making or stopping a payment

The disclosure must inform the mem-ber of the credit union’s statutory liabili-ty for actual and consequential damages resulting from the credit union’s failure to make an EFT or failure to stop an electronic fund transfer in accordance with the agreement or the member’s stop payment request.

Confidentiality

Credit union practices on the transfer of any information to third parties about the member or the member’s account must be disclosed. The FRB has provided a broadly worded model disclosure that should fit most credit unions’ practices.

Error-resolution procedure notice

The initial disclosure must include a notice concerning the credit union’s error-resolution procedures and the member’s rights concerning errors. The notice should be substantially similar to the text of the disclosure provided in Appendix A of Regulation E. Credit unions should be aware that the time frame for investigation of errors and noti-fication to members is extended for new accounts and EFT transactions not initi-ated in the U.S.

Note: Credit unions should be aware that the member’s rights and the error-resolution procedures under this regula-tion differ substantially from the rights, error procedures, and disclosures under Truth In Lending and, therefore, a single combined disclosure satisfying both laws is almost impossible.



ATM surcharge notice

The initial disclosure must include a notice that a fee may be imposed by an ATM operator when a member initiates an EFT or makes a balance inquiry at an ATM operated by another institution and by any network used to complete the transaction. The Federal Reserve Board’s model language suggests the following:

When you use an ATM not owned by us, you may be charged a fee by the ATM operator [or any network] (and you may be charged a fee for a bal-ance inquiry even if you do not com-plete a funds transfer).

Subsequent EFT Documentation

Change in terms

If the credit union changes a term or condition originally disclosed to the member in a way that restricts the EFT services available, increases fees or charges, increases the member’s liabil-ity, or places stricter limits on the dollar amount or frequency of transfers permit-ted, then the credit union must mail or deliver to the member a written notice of the change at least 21 days before the change becomes effective.

The credit union need not give prior notice if an immediate change in terms or conditions is necessary to maintain or restore the security of an account or an EFT system. For example, if a credit union determines that a security risk exists and must therefore restrict a mem-ber’s ATM access to his or her accounts.

If, however, the change is made perma-nent, subsequent notice must be given, unless continued secrecy is essential to maintain the security of the system. For example, the credit union need not notify the member that certain limitations will not be in effect during periods when the system is offline.

Annual error notification

A credit union must either provide an annual long-form notice of its error reso-lution procedures or it may incorporate a short-form notice in each periodic state-ment. The required text of both notices is specified in Appendix A of Regulation E, and examples of the notices are shown as Appendix 3-B and 3-C of this section.

Documentation of transfersReceipts at electronic terminals

At the time a transaction is initiated at an electronic terminal (for example ATM or EFT kiosk), the credit union must ensure the member receives a written receipt, including the following information about the transaction:

• The amount of the transfer

• The calendar date of the transfer

• Type of transfer and the type of accounts involved

• A number or code that uniquely iden-tifies the member, the member’s account, or the access device used to make the transfer

• The location of the terminal

• The name of any third party to whom or from whom funds are transferred

NOTE:

Error resolution notice must be provided:• Long-form, once per year;

or • Short-form, on each

periodic statement



EFTs of $15 or less do not require receipts.

Periodic statement requirements

A periodic statement must be sent to a member for each month during which an EFT has occurred. If no EFT activ-ity occurs, a statement must be sent at least quarterly.

For each EFT, the following disclo-sures are required on the statement, as applicable:

• The amount of the transfer

• The date the transfer is posted

• The type of transfer and the type of account

• For ATM-type transfers, the location of the terminal

• The name of any third party receiving or sending funds

The periodic statement must also include:

• The account number(s) for which the statement is issued

• The amount of fees and charges assessed during the statement period for EFTs, the right to make transfers, or account maintenance

• Beginning and ending balances on each account

• The address and telephone number for inquiries and error notification

• The telephone number to call to find out whether a preauthorized transfer to the member’s account has occurred

Where a direct deposit is the only EFT

service provided by the credit union, a quarterly periodic statement, rather than monthly, is permitted.

Note: A periodic statement must be provided for each monthly or shorter cycle in which an EFT has occurred.

Disclosures at ATMs

If a credit union charges a fee to non-members for conducting transactions on ATMs it operates, the credit union must disclose that a fee will be imposed and the amount of that fee either on the ATM screen or as a paper notice the nonmem-ber receives before agreeing to complete the transaction. No fee may be charged unless the nonmember receives the fee notice and then elects to continue the transaction. Some states also require that the credit union post a notice on or at the ATM.

Credit unions may disclose on ATM signage that a fee will be imposed or that a fee “may” be imposed on consum-ers initiating an EFT or balance inquiry if there are circumstances under which some consumers would not be charged for such services. However, if a fee will be imposed in all instances, the notice must state that a fee “will” be imposed.

Consumer Authorization for Electronic Check Conversions

The credit union will also have to fol-low certain rules if it initiates an elec-tronic check conversion transaction (for example, the credit union converts a check to an EFT from another institu-



tion provided as payment for a mortgage loan). These rules generally apply to merchants, but also cover any other payee that initiates one of these transac-tions.

An electronic check conversion transaction can only proceed when it has been authorized by the consumer. A consumer authorizes the transaction when he receives the appropriate notice and then “goes forward with the transac-tion” (formerly “completes the transac-tion”). The credit union must notify the consumer that:

• The check will be processed as a one-time EFT; and

• The funds may be debited from the consumer’s account as soon as the same day payment is received, and, as applicable, that the consumer’s check will not be returned by the financial institution holding the account.

For point-of-sale (POS) transactions, a notice must be posted in a prominent and conspicuous location, and a copy of the notice must be provided to the consumer at the time of the transaction, such as on the receipt. For accounts receivable conversion (ARC) transac-tions, the notice will typically be on a billing statement or invoice. The credit union need not obtain the member’s written authorization to conduct the transaction.

Model Clauses for Authorizing One-Time EFT Using Information from a Check (Reg E Appendix A-6)

Notice About Electronic Check Conversion:When you provide a check as pay-

ment, you authorize us either to use

information from your check to make a one-time electronic fund transfer from your account or to process the payment as a check transaction.

[You authorize us to collect a fee of $ ___ through an electronic fund transfer from your account if your payment is returned unpaid.]

Alternative Notice about Electronic Check Conversion (Optional):

When you provide a check as pay-ment, you authorize us to use informa-tion from your check to make a one-time electronic fund transfer from your account. In certain circumstances, such as for technical or processing reasons, we may process your payment as a check transaction.

[Specify other circumstances (at pay-ee’s option).]

[You authorize us to collect a fee of $ ___ through an electronic fund transfer from your account if your payment is returned unpaid.]

Notice for Providing Additional Information about Electronic Check Conversion:

When we use information from your check to make an electronic fund trans-fer, funds may be withdrawn from your account as soon as the same day [you make] [we receive] your payment [,and you will not receive your check back from your financial institution].

Preauthorized Transfers

Transfers to a member’s account

If a member’s account will be cred-ited by the same payor at least once every sixty days, then the credit union



must provide a means for the member to determine whether or not the payment has been received. The credit union may use one of the following three methods to meet this requirement: (1) provide oral or written notice within two busi-ness days every time the transfer occurs; (2) provide notice within two business days of the scheduled payment date that the transaction did not occur; or (3) provide a toll-free phone number for the member to call to verify receipt of the deposit. A toll-free number must be “readily available” so that the member does not consistently get a busy signal. It must also be at no cost to the mem-ber, if the member lives within the pri-mary service area of the credit union or a branch of the credit union electing to use the telephone notification option.

Preauthorized transfers to a member’s account must be posted as of the day the funds are received.

Transfers from a member’s account

Preauthorized transfers from a mem-ber’s account may only be authorized in writing. Under the Electronic Signatures in Global and National Commerce Act (ESIGN), written authorizations may be provided electronically. (See the Electronic Communication section.) These include regular, recurring trans-fers from a member’s account. For example, the preauthorized payment of an insurance premium, utility bill, or health club fees. In contrast, periodic payments under an electronic bill pay-ment generally are not preauthorized transfers.

The party obtaining the authoriza-

tion must provide the member a copy of the authorization. If a copy is provided by a third-party payee (for example an insurance company) the credit union does not need to obtain a copy of the authorization from the third-party payee. Included as Appendix 3-D of this sec-tion is Loanliner® Automatic Transfer Authorization which satisfies the written preauthorized, transfer-authorization requirements.

A member may stop payment on a preauthorized debit by notifying the credit union either orally or in writing, at any time up to three business days before the scheduled date the transfer is to be stopped. Credit unions receiving such notice should ascertain whether the member wishes to stop only the cur-rent payment or wishes to stop all future payments. If the member is revoking the authorization, all future payments should be blocked. The credit union receiving an oral stop payment request may, at the time the oral request is received, require a written confirmation of the order which must be provided within fourteen days of the member’s oral notification. If the member fails to provide the written confirmation, the credit union cannot be held liable for violations of Regulation E or the EFT Act due to the failure to stop an electronic fund transfer. If the member fails to pro-vide the written confirmation, the credit union cannot be held liable for failing to make a stop payment.

When a preauthorized debit varies in amount, the party receiving the payment must notify the member of the amount of the current debit, in writing, at least ten days before the debit is scheduled to occur. The credit union does not violate



Regulation E if the designated payee fails to provide notice of the varying amount. Under limited circumstances, the member may elect to receive notice only when the debit will vary by more than a previously agreed-upon amount from the previous payment.

Error-Resolution Procedures for EFTs

The error-resolution procedures in the EFT Act parallel those of Truth In Lending (Regulation Z). However, the time frames are different and reflect the fact that when an error occurs, the member has already lost the use of the funds — they have been withdrawn from the account. In addition, keep in mind that the error-resolution procedures for an EFT differ from the error-resolution procedures for a remittance transfer under Regulation E.

To the extent there are any errors with respect to a transaction or billing state-ment, the credit union has specific duties to investigate and resolve such errors. The definition of an error is complex. Under Regulation E, an error includes any of the following seven items:

1. An unauthorized EFT

2. An incorrect EFT to or from a member’s account

3. An omission from a periodic state-ment of an EFT that should have been included

4. A computational error relating to an EFT

5. Receipt by the member of an incorrect amount of money at an electronic terminal

6. An incorrectly identified EFT

7. A member’s request for additional infor-mation concerning an EFT other than a routine balance inquiry

Error notification by member

The member’s notice of an error may be oral or in writing and is timely if it is received by the credit union within 60 days of the first transmittal of a periodic statement that reflects the error. Certain events such as loss or theft or being out of the country may trigger slightly differ-ent timing rules.

The notice must include enough information to enable the credit union to identify the member’s name and account number and, to the extent pos-sible, the type, date, and amount of the error. Where the notification of the error is made orally, the credit union may require written confirmation within 10 business days. If confirmation is not received, then the credit union need not provisionally recredit any amount claimed but must still investigate the error, report the results of the investi-gation to the member, and correct the error, if actually found.

Error investigation

After receiving notification of an EFT error, the credit union must promptly investigate the error and report the results within 10 business days (20 business days for new accounts less than 30 days old). If the investigation cannot be completed within this time frame, the credit union may take up to 45 calendar days to complete the inves-tigation on condition that it:



1. Provisionally recredit the funds to the member’s account by the end of 10 business days of receiving the error notice (20 business days for new accounts)

2. Advises the member of the provisional recrediting within two business days of the recrediting

3. Give the member full use of the pro-visionally recredited funds during the investigation

If the EFT transaction was not initiat-ed in the U.S. or involves a point-of-sale debit card or a new account less than 30 days old, the investigation period is extended to 90 calendar days instead of 45 calendar days. These longer time limits were added because of the dif-ficulty encountered in getting remote or nonfinancial institutions outside the U.S. to provide needed data and to help reduce the risk of fraud involved with new accounts.

What if the notice is late? The credit union is not required to comply with these requirements for any notice of error from the member that is received later than 60 days from the date on which the periodic statement first reflecting the error was sent. However, the Fed has clarified that where the member’s assertion of an error involves an unauthorized EFT, the credit union must comply with the provisions on lia-bility for unauthorized transfers before it may impose any liability on the member.

Extent of the investigation

Regulation E permits the credit union to limit an error investigation to “a review of its own records’’ where the

allegation involves a transfer to or from a third party with whom the credit union has no agreement for the type of EFT involved. This is commonly referred to as the “four walls” rule (for example - the investigation is limited to the four walls of the institution). A credit union does not have an agreement with a third party solely because it participates in transactions that occur under the federal recurring payments programs, or that are cleared through an ACH or similar arrangement for the clearing and settle-ment of fund transfers generally, or because it agrees to be bound by the rules of such an arrangement.

The extent of the investigation required may vary depending on the facts and circumstances. However, the credit union may not limit its investiga-tion solely to the payment instructions where additional information within its own records pertaining to the particu-lar account in question could help to resolve a member’s claim. Information that may be reviewed as part of an inves-tigation might include:

• The ACH transaction records for the transfer;

• The transaction history of the particu-lar account for a reasonable period of time immediately preceding the alle-gation of error;

• Whether the check number of the transaction in question is notably out of sequence;

• The location of either the transaction or the payee in question relative to the consumer’s place of residence and habitual transaction area;



• Information relative to the account in question within the control of the institu-tion’s third-party service providers if the financial institution reasonably believes that it may have records or other infor-mation that could be useful; or

• Any other information appropriate to resolve the claim.

Notification of resolution to the member

If, after investigation of an error, the credit union determines that an error has occurred, it must — within one business day — correct the error, credit any interest, and refund any charges. The credit union must provide the mem-ber with an oral or written report of the correction within three business days after the investigation has been com-pleted. If applicable, the credit union must notify the member that a provi-sional credit has been made final within three business days after completing its investigation.

If the credit union’s investigation reveals that no error occurred, or that the error is different in manner or amount from the one the member described, then the credit union must provide the member a written explanation within three business days after concluding its investigation. The notice must inform the member of his right to request the written documentation relied upon by the credit union in making the determi-nation that an error did not occur.

Upon debiting a provisionally recred-ited amount, the credit union must pro-vide the member the date and amount of the debit and inform the member that

share drafts and preauthorized debits will be honored for five business days if they are payable to third parties. This is designed to allow the member the oppor-tunity to replace funds where items have been drawn on provisionally recredited amounts. Also, if the account for which an error report is investigated has a credit feature, such as an overdraft line of credit, the error-resolution procedures of Regulation E, rather than Regulation Z (Truth In Lending), apply.

Member Liability for Unauthorized Transfers

Members are only responsible for EFTs they authorize and make. If an EFT is not authorized and the member properly informs the credit union, the member cannot be held liable for the transaction. An unauthorized electronic funds transfer includes any EFT from a member’s account initiated by a person without actual authority to do so and from which the member does not ben-efit. A credit union employee making a transfer affecting the account requested by the member does not fall under this definition, even though an error may result. Likewise, a member may alert the credit union that a previously authorized user is no longer authorized to use the account and that further use, if permit-ted by the credit union, is considered an unauthorized EFT. Further, the term “unauthorized EFT” does not include a transaction initiated with fraudulent intent by the member or any person act-ing together with the member.

And finally, the reversal of a direct deposit made in error is not an unauthor-



ized EFT when it involves any of the fol-lowing:

• a credit to the wrong member’s account,

• a duplicate credit to a member’s account,

• a credit for the wrong amount (for example, the amount credited to the member’s account differs from the amount in the transmittal instructions)

Preconditions to asserting liability

A member may be held liable within the limits described for unauthorized use of an access device only if (1) the access device has been accepted, (2) the credit union provided a means by which the member could be identi-fied, and (3) the credit union provided the following disclosures: a summary of the member’s liability for unauthor-ized EFTs; the telephone number and address for reporting unauthorized EFTs, and a disclosure listing the credit union’s business days. A member may be held liable within the limitations described for all other unauthorized EFTs involving the member’s account only if the credit union disclosed a sum-mary of the member’s liability for unau-thorized EFTs; the telephone number and address for reporting unauthorized EFTs, and a disclosure listing the credit union’s business days.

Liability after loss or theft

If the member notifies the credit union within two business days of dis-

covering a loss or theft of an access device, the member will be liable for the lesser of $50 or the amount of money or property obtained through the unau-thorized use before the credit union was notified. The two-business day period does not include the day the member discovers the loss or theft or any day that is not a business day. Two 24-hour segments are used to calculate the two-business day period without regard to the credit union’s business hours or the time of day the member discovers the loss or theft.

An extension can be made to the two-day period under special circumstances:

• the member is in the hospital or

• the member is away from home and does not discover the loss or theft until returning

Example: Mary Smith’s ATM card is stolen on Monday but she doesn’t dis-cover the loss until Wednesday. During that time the thief made a withdrawal of $100 from a nearby ATM. If Mary noti-fies her credit union within two business days of discovering that her card was stolen (by midnight Friday), the $50 liability limit would apply. If a member notifies the credit union more than two business days after discovering the loss or theft, greater liability occurs. That liability would be the lesser of:

• $500 or

• the sum of

1. $50 or the amount of the unauthorized transfers that occurred within the two business days (whichever amount is less) and

2. the amount of unauthorized transfers



that occurred after two business days and before the credit union was notified if the credit union can establish that it would have prevented additional losses if the member provided timely notification.

Example: John Clark’s ATM card was stolen on Monday and he discovers the theft that same day. John reports the theft to his credit union on Friday. During that time $600 worth of with-drawals have been made. The $500 liability limit would apply because John failed to notify the credit union within two business days of discovering his card was stolen. The two-day deadline expired on midnight Wednesday.

Exactly how much a member is liable for depends on when the unauthorized transfers take place. Example: Betty’s ATM card is stolen on Tuesday but she doesn’t report the theft to her credit union until the following Monday. A $100 unauthorized transfer is made on Tuesday (the day the card was stolen) and a $600 unauthorized transfer on Thursday of that same week. Betty is liable for $500 – $50 of the $100 trans-fer on Tuesday plus $450 of the $600 transfer on Thursday to reach the $500 maximum.

However, if $600 was taken on Tuesday and $100 on Thursday, Betty’s liability would only be $150–$50 of the $600 transfer on Tuesday plus the full $100 transfer on Thursday.

Unauthorized use reflected on periodic statement

If a periodic statement shows an unauthorized transfer made with a lost or stolen access device, the member

must notify the credit union within 60 calendar days after the periodic state-ment was sent. If notification is not made within that time period, the mem-ber faces unlimited liability for all unau-thorized transfers made after the 60-day period. The member’s liability for unau-thorized transfers before the statement is sent and up to 60 days following will be as follows: 1) up to $50 if the mem-ber notifies the credit union within two business days of learning of the loss or theft of the access device or 2) up to $500 if the member notifies the credit union after two business days of learning of the loss or theft.

If a periodic statement shows an unauthorized transfer that does not involve an access device, the member must notify the credit union within 60 calendar days after the statement is sent.

Example: Frank is reviewing the state-ment he just received and notices an ACH debit from his share draft account for $200 that he did not authorize. Frank calls his credit union and points out this erroneous debit within a week of the date of his statement. Because Frank called within the 60-day deadline, he has zero dollars liability.

However, if a member fails to report an unauthorized transfer within that 60-day time period, the member may be liable for any transfers occurring after the close of the 60 days and before the notice is given to the credit union.

Example: Samuel receives his peri-odic statement dated June 25 and notices a $200 ACH debit to his share draft account that he did not autho-rize. Samuel doesn’t call his credit union about this debit until September 15 (he missed the 60-day deadline).



On September 5 another erroneous ACH debit of $400 hits his share draft account. Because Samuel did not notify his credit union about the $200 debit until September 15 (21 days past the 60-day deadline) he may be liable for the $400 debit.

Different rules for Visa and MasterCard debit cards

Visa and MasterCard have imple-mented operating rules that adopt stricter limits than those imposed by Regulation E. The Visa and MasterCard rules for debit card (for example, point-of-sale) transactions reduce the mem-ber’s liability to zero dollars if notice is received within two business days of the discovery of the loss unless the member was grossly negligent. For other asser-tions of unauthorized transactions, the Regulation E maximum liability of $50 will apply.

Payroll cards

The Federal Reserve Board issued an interim final rule on payroll cards effec-tive July 1, 2007. Under the interim rule, payroll cards are considered “accounts” for purposes of Regulation E. The rule covers accounts that are directly or indirectly established by an employer to which electronic fund trans-fers of the consumer’s wages or other compensation are made on a recurring basis (one-time payments, such as a final paycheck or emergency situation would not be covered).

Payroll card accounts are covered by Regulation E whether the funds are held in individual employee accounts,

or in a pooled account with some form of sub-accounting maintained by a depository institution or third party. A credit union will be required to comply with this rule if it directly or indirectly holds a payroll card account, or issues an access device to a consumer for use in initiating an EFT from a payroll card account.

Periodic statements

The Fed has modified the Regulation E disclosure requirements for payroll card accounts so that credit unions have flexibility in how to provide certain account transaction information to pay-roll card users. Credit unions may elect to provide periodic statements as they normally would for other accounts, or may use an alternative means to provide the account information.

Instead of providing periodic state-ments, institutions may:

• Provide access to the account balance through a readily available telephone line;

• Provide access to an electronic history (such as through an Internet website) of the member’s account transactions that covers at least 60 days preceding the date the member electronically accesses the account (for example - enters a user identification code or a password or otherwise complies with a security procedure used by an institu-tion to verify a consumer’s identity); and

• Provide promptly upon the member’s oral or written request, a written his-tory of the member’s account trans-actions that covers at least 60 days



preceding the date of receipt of the request.

Initial disclosures

If the credit union uses the above method of providing account informa-tion (rather than the customary periodic statement), it must provide in its initial disclosure the means by which a mem-ber can access information about his payroll card account, including the tele-phone number that he may call to obtain his account balance, and information on how the member can electronically obtain a history of account transactions. This could include the address of an Internet website.

Credit unions must also include a summary of the member’s right to obtain a written history of account transactions upon request, including a telephone number to request a history. Instead of the current Regulation E initial and annual notice for error-resolution rights, the credit union must provide an initial and annual notice explaining the error resolution rights associated with payroll card accounts. There are model forms that credit unions may use to facilitate compliance with this interim final rule.

Model Clauses For Financial Institutions Offering Payroll Card Accounts (Reg E, Appendix A-7)

(a) Disclosure by financial institutions of information about obtaining account information for payroll card accounts. § 1005.18(c)(1).

You may obtain information about the amount of money you have remaining in your payroll card account by calling

[telephone number]. This information, along with a 60-day history of account transactions, is also available on-line at [Internet address].

You also have the right to obtain a 60-day written history of account trans-actions by calling [telephone number], or by writing us at [address].

(b) Disclosure of error-resolution pro-cedures for financial institutions that provide alternative means of obtaining payroll card account information (§1005.18(c)(1)(ii) and (c)(2)).

In Case of Errors or Questions About Your Payroll Card Account, Telephone us at [telephone number] or write us at [address] [or E-mail us at [electronic mail address]]as soon as you can, if you think an error has occurred in your pay-roll card account. We must hear from you no later than 60 days after the ear-lier of the date you electronically access your account or the date we sent the FIRST written history on which the error appeared. You may request a written his-tory of your transactions at any time by [calling us at (telephone number)] [writ-ing us at (address)]. You will need to tell us:

• Your name and [payroll card account] number.

• Why you believe there is an error, and the dollar amount involved.

• Approximately when the error took place.

If you tell us orally, we may require that you send us your complaint or ques-tion in writing within 10 business days.

We will determine whether an error occurred within 10 business days after we hear from you and will correct any error promptly. If we need more time, however, we may take up to 45 days to



investigate your complaint or question. If we decide to do this, we will credit your account within 10 business days for the amount you think is in error, so that you will have the money during the time it takes us to complete our investigation. If we ask you to put your complaint or question in writing and we do not receive it within 10 business days, we may not credit your account.

For errors involving new accounts, point-of-sale, or foreign-initiated trans-actions, we may take up to 90 days to investigate your complaint or question. For new accounts, we may take up to 20 business days to credit your account for the amount you think is in error.

We will tell you the results within three business days after completing our investigation. If we decide that there was no error, we will send you a written explanation.

You may ask for copies of the docu-ments that we used in our investigation.

If you need more information about our error-resolution procedures, call us at [telephone number][the telephone number shown above] or visit [Internet address].

Liability limitations and error reporting

If the credit union opts not to provide a paper periodic statement, the interim final rule specifies two different triggers for beginning the 60-day period for lim-iting liability for unauthorized EFTs. The two triggers depend on when and how the consumer has obtained a history of his or her account transactions.

If the member obtains transaction information electronically, the 60-day

period begins on the date the account is electronically accessed. If the mem-ber has requested a written history, the 60-day period begins on the date the credit union sends the written history.

For members who review their account history both electronically and with a written history, the 60-day period begins to run with the earliest of the two dates outlined above.

Electronic Communication

Regulation E no longer mandates any particular means of electronic delivery of disclosures, such as sending and re-sending disclosures via e-mail. These requirements were eliminated because of concerns about data security, identity theft, and “phishing” (using fraudulent e-mail requests to obtain consumers’ confidential personal or financial infor-mation). The Fed also eliminated the provisions regarding retention of elec-tronic disclosures posted on a website for at least 90 days, since industry prac-tice is to retain the information for much longer.

Credit unions are now simply permit-ted to deliver Regulation E disclosures to consumers in electronic form, subject to compliance with the consumer consent provisions of the Electronic Signatures in Global and National Commerce Act (ESIGN). See also “General Disclosure Requirements” earlier in this section.



Opt-in Notice for ATM and One Time Debit Card Overdrafts

The Reg E overdraft rule (Sec. 1005.17) covers ATM and one-time debit card overdrafts. The regulation does not cover overdrafts related to check, ACH, or recurring debit transac-tions (e.g., preauthorized electronic fund transfers).

Reg E requires a credit union to pro-vide an opt-in notice and obtain the member’s affirmative consent before charging any fees for paying ATM and one-time debit card overdrafts “pursuant to the institution’s overdraft service.” The term “overdraft service” means: “a service under which a financial institu-tion assesses a fee or charge on a con-sumer’s account held by the institution for paying a transaction (including a check or other item) when the consumer has insufficient or unavailable funds in the account.” Under the broad defini-tion, a credit union has an overdraft service if it ever charges fees for paying ATM/POS overdrafts.

The term “overdraft service” does not include any payment of overdrafts via a line of credit subject to Reg Z, includ-ing transfers from a credit card account, home equity line of credit, or overdraft line of credit; or a the transfer of funds from another account held individually or jointly by the member, such as a sav-ings account.

Four-step opt-in requirement

A credit union cannot charge a fee on a member’s account for paying an ATM

or one-time debit card overdraft, unless the credit union:

1. Provides the member with a notice in writing (or electronically, if the member agrees) segregated from all other infor-mation, describing the credit union’s overdraft service(s).

2. Provides a reasonable opportunity for the member to affirmatively consent, or opt in, to the service for ATM and one-time debit card transactions. A credit union can provide a form to fill out and return in person or mail back to the credit union; a readily available telephone line that members can call to opt-in; or for members who have agreed to do business electronically, a Web-based form where members can click on a check box and then click a button to confirm their choice.

3. Obtains the member’s affirmative con-sent, or opt-in, to the credit union’s payment of ATM or one-time debit card transactions. Note that the consent must be obtained separately from other consents or acknowledgements, includ-ing the consent to receive disclosures electronically.

4. Provides the member with confirma-tion of his consent in writing (or elec-tronically, he agrees), which includes a statement informing the member of the right to revoke such consent. The credit union can provide a copy of the mem-ber’s completed form or send a separate letter acknowledging that the member has elected to opt into the overdraft service. Credit unions cannot assess an overdraft fee until they send the written confirmation.



Affirmative consent and revocation

The member may affirmatively con-sent to the credit union’s overdraft ser-vice at any time in the manner described in the opt-in notice, and may revoke consent at any time in the same man-ner used to provide consent. The mem-ber’s affirmative consent to the credit union’s overdraft service is effective until revoked by the member (unless the credit union terminates the service). And, the credit union must implement the member’s revocation of consent as soon as “reasonably practicable.”

For joint accounts, the credit union must treat the affirmative consent of any of the joint account owners as affirma-tive consent for that account. Similarly, the credit union must treat a revocation of affirmative consent by any of the joint account owners as revocation of consent for that account.

Opt-in notice

Section 1005.17(d) of Reg E con-tains specific content and format requirements for the consumer opt-in notice. The notice must be substantially similar to the Model Form A-9 set forth in Appendix A of the regulation and include (as applicable):

• a brief description of the credit union’s overdraft service and the types of transactions covered by the service, including ATM and one-time debit card transactions;

• the dollar amount of any fees or charg-es assessed by the credit union for paying an ATM or one-time debit card transactions;

• the maximum number of overdraft fees or charges that may be assessed per day, or, if applicable, that there is no limit;

• an explanation of the member’s right to opt-in to the credit union’s over-draft service for the payment of ATM and one-time debit card transactions, including the methods by which the member may consent to the service; and

• any alternative plans for covering overdrafts (e.g., line of credit or funds transfer from another account to cover overdrafts), if available.

The credit union may modify the con-tent to:

• Indicate that the member has the right to opt-in to, or opt-out of, the pay-ment of overdrafts under the institu-tion’s overdraft service for other types of transactions, such as checks, ACH transactions, or automatic bill pay-ments;

• Provide a means for the member to exercise this choice; and

• Disclose the associated returned item fee and that additional merchant fees may apply.

• Disclose the member’s right to revoke consent.

The credit union may tailor Model Form A-9 to whatever methods it offers members to opt-in to the service. For example, the credit union need not pro-vide the tear-off portion or the form if it is only permitting members to opt-in via telephone or electronically.

The credit union may use any reason-



able method to identify the account for which the member submits the opt-in notice. For example, the credit union may include a line for a printed name and an account number. Or, it may print a bar code or use other tracking information.

Exception to the notice and opt-in requirements

The regulation provides an excep-tion to the notice and opt-in require-ment for institutions that have a policy and practice of declining to authorize and pay ATM and one-time debit card transactions that they reasonably believe would overdraw the consumer’s account. Credit unions may apply this exception on an account-by-account basis.

This is not an exception to the fee prohibition. The credit union still can-not charge a fee unless it has provided the proper notice, and obtained the member’s affirmative consent/opt-in— even in cases where the credit union doesn’t have a formal overdraft program but pays an authorized ATM/debit card transaction that overdraws a member’s account. The credit union can, however, deduct the amount overdrawn from the members account.

Further, without a member’s opt-in, the credit union cannot charge a fee for declining to pay an ATM/debit card transaction.

Cannot condition opt-in or vary account terms

Credit unions cannot require the member to opt-in to the overdraft service for ATM/debit card transactions in order to have checks, ACH and other types

of transactions paid. Credit unions also cannot decline to pay check, ACH and other transactions because the member hasn’t opted in to the ATM/debit card overdraft service

Credit unions must provide members who don’t opt-in with the same account terms, conditions and features as pro-vided to consumers who do opt in. For example, interest/dividend rates paid, fees assessed, type of debit card pro-vided, minimum balance requirements, account features like access to online bill payment, etc.

Gift cards

Regulation E restricts fees and expira-tion dates that apply to gift cards, cer-tificates and general use prepaid cards that are sold or issued to consumers pri-marily for personal, family or household purposes.

Regulation E defines “gift card” as a card, code or other device that is:

• Issued on a prepaid basis primarily for personal, family or household purposes to a consumer in a specified amount that may not be increased or reloaded in exchange for payment; and

• Redeemable upon presentation at a single merchant or an affiliated group of merchants for goods and services.

The term includes store gift cards as well as network-branded (e.g., Visa, MasterCard), general-use prepaid cards that are redeemable at any merchant that accepts the card brand. The regula-tion also applies when a physical card is not issued if the device or means of access otherwise acts as a gift card, such as when funds are accessible via



an account number, code, or embedded computer chip.

The rule does not apply to cards where the end use is a business purpose, such as travel expenses or office supplies. However, the rules will apply if a business purchases cards and resells or distributes them to consumers primarily for personal, family, or household purposes.

The regulation excludes certain pre-paid products, for example:

• Prepaid cards received through loyalty, award, or promotional programs are not subject to the rule’s restrictions on imposing dormancy, inactivity, or ser-vice fees, or expiration dates. However, to avoid consumer confusion, the card must state on the front that it is issued for loyalty, award, or promotional pur-poses, and any funds expiration date that may apply. In addition, all fees must be disclosed on or with the card or certificate.

• Reloadable cards that are not market-ed or labeled as gift cards, for example cards provided to the “unbanked” as a substitute for a traditional account, as well as cards that substitute for trav-eler’s checks.

• Certificates issued solely in paper form where only the paper itself may be used to purchase good and services. This exclusion does not apply if the certificate has a bar code or certificate number that may be used to purchase goods and service, or if it’s sent elec-tronically and then reproduced on paper.

• Cards not marketed to the general pub-lic, prepaid telephone service cards, and cards redeemable for admission to

certain events or venues.

Restrictions on dormancy, inactivity, or service fees

Under the regulation, no “person” may impose a dormancy, inactivity or “service fee” with respect to a gift cer-tificate, store gift card, or general use pre-paid card, unless three conditions are satisfied:

1. These fees may only be imposed if there has been no activity on the gift card or certificate within the one-year prior to the imposition of the fee;

2. Only one such fee may be assessed in a given calendar month;

3. Disclosures regarding dormancy, inactiv-ity or service fees must be clearly and conspicuously stated on the gift card or certificate, and the person issuing or selling the card/certificate must pro-vide these disclosures to the purchaser before the card or certificate is pur-chased.

“Service fees” are defined as periodic fees that are assessed in connection with the card, as opposed to a one-time fee (e.g., a replacement card fee). The issuer/seller may not retroactively assess dormancy, inactivity, or service fees after the one-year period for prior time periods.

Expiration date restrictions

The regulation also restricts expiration dates. Gift cards or certificates may not be sold or issued unless the expiration date of the funds underlying the certifi-cate or card is no less than five years after the date of issuance (in the case



of a gift certificate); or five years after the date of the last load of funds (in the case of a store gift card or general use pre-paid card), which would be the date when the card and funds were activated. The gift card issuer/seller won’t have to restart the five-year period if it issues or activates a replacement card.

Prior to purchase, the issuer/seller must clearly and conspicuously disclose on the card or certificate: whether the funds underlying the card or certificate may expire; any difference between the expiration date of the actual card/certifi-cate and that of the underlying funds; and that the consumer may contact the issuer/seller for a replacement card.

If the expiration date of the card is different from the expiration date of the underlying funds, the issuer or seller must establish policies and procedures to insure that a consumer has a reason-able opportunity to purchase a card with an expiration date that is at least five years from the date of purchase.

No fees are allowed for replacement cards when the expiration date of the card occurs before the expiration of the underlying funds. However, fees may be charged to replace lost or stolen cards if otherwise permitted by law.

The regulation doesn’t require the replacement of lost, stolen, or expired cards. The issuer/seller may send the remaining balance to the consumer instead. However, no fee may be charged for sending the remaining bal-ance unless the card was lost or stolen.

Additional disclosure requirements

In addition to the restriction on dor-mancy, inactivity and service fees, the regulation requires the disclosure of all

other fees imposed in connection with a gift certificate, store gift card or general use pre-paid card. Disclosures include the type of fee, the amount and how it is determined, and the conditions in which the fee may be imposed. Such fees must be “clearly and conspicuously” disclosed on or with the card or certifi-cate prior to purchase. The regulation also requires the disclosure of a toll-fee telephone number and website if one is maintained that consumers may use to obtain information on fees or replace-ment cards.

The required disclosures must be in written or electronic form, in a retainable or printable form. For electronic disclo-sures, the consent and other require-ments under the Electronic Signatures in Global and National Commerce Act (ESIGN) will not apply. However, the disclosures still must be provided prior to purchase. Therefore, consumers should not be able to bypass electronic disclosures provided via hyperlink.

Special Credit Union Rules and Concerns

Issuance of access devices

Regulation E governs the issuance of access devices, including those connect-ed with pre-existing overdraft accounts or the addition of EFT capabilities to an existing credit card.

In general, an access device may be issued only upon the specific request of a member or as a renewal or substitution for an accepted access device. However, an unsolicited access device may be issued to a member if: (1) it is not vali-



dated, (2) it is accompanied by a clear explanation that the access device is not validated and how the member may dispose of it if validation is not desired, (3) it is accompanied by a complete ini-tial Regulation E disclosure, and (4) it may be activated only upon oral or written request from the member and after verifi-cation of the member’s identity by some reasonable means. Where audio response permits access to a line of credit, the PIN may be a credit card so an advance PIN request is strongly suggested.

Compulsory use per Regulation E §1005.10(e)

The statute prevents a credit union from requiring a member to use elec-tronic funds transfers to repay a loan, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the member’s account. Remember, however, not all payroll deduction plans are actually electronic funds transfers. Also, there is no prohibition on encour-aging the use of EFT as a means of repayment by offering another incentive like a lower rate.

Waiver of rights

The statute prohibits credit unions from including anything in their EFT agreement that would constitute a waiver of any right provided under the EFT Act.

Record retention

The credit union must keep documen-tation of compliance with Regulation E for at least two years.

State law

Some states have adopted EFT laws that have specific differences from the EFTA and Regulation E. Credit unions should consult with their state leagues for guidance on any state law require-ments.

Remittance transfers

In February 2012, the CFPB pub-lished amendments to Regulation E to provide new protections to consum-ers who send remittance transfers to consumers or businesses in foreign countries. The amendments implement Dodd-Frank requirements and are sched-uled for mandatory compliance to occur in 2013. The rules cover credit unions, banks and money transmitters that offer remittance transfers (i.e., international money transfers). Small dollar transfers of $15 or less are excluded from the rule’s coverage.

A “remittance transfer” is an elec-tronic funds transfer requested by a sender (i.e., consumer in the United States) to a designated recipient (in a foreign country) that is sent by a remit-tance transfer provider. The definition is quite broad, but generally covers EFTs like international wire transfers and cross-border ACH transactions. It also covers transfers where a consumer provides cash or another method of pay-ment to the credit union and requests that funds be sent to a specified location or account in a foreign country. And, under certain circumstances, the defini-tion can also cover electronic bill pay-ments scheduled in advance.

A “remittance transfer provider”



(“provider”) is a “person” that provides “remittance transfers” for consum-ers in the “normal course of business” (regardless of whether the consumer holds an account with such person). Whether a credit union provides remit-tance transfers in the normal course of business depends on the facts and cir-cumstances, including the total number and frequency of remittance transfers provided by the institution. If an entity provided 100 or fewer remittance trans-fers in the previous calendar year, and provides 100 or fewer transfers in the current calendar year, that entity is not considered to be providing remittances transfers for consumers in the “normal course of business.” If an entity exceeds the safe harbor level, the entity has up to six months to come into compliance with the remittance regulation.

A credit union will not be considered to be acting as a remittance transfer provider when it performs activities as an “agent” on behalf of a remittance transfer provider (e.g., credit union pro-vides remittances under a contract with Western Union).

Required disclosures

The final rule requires a remit-tance transfer provider to provide a pre-payment disclosure and a receipt. Disclosures must be clear and conspicu-ous, generally be provided in writing, and must be in a retainable form. Model forms are found in Appendix A to the regulation.

Pre-payment disclosure: A provider must provide a written pre-payment disclosure to a sender when the sender requests the remittance transfer, before a payment is

made. An oral pre-payment disclosure is permitted if the transaction is conducted entirely by telephone. The pre-payment dis-closure must include:

• The amount in the currency in which the funds will be transferred;

• Any fees and taxes imposed by the provider, in the currency in which the funds will be transferred;

• The total amount of the transac-tion, which is the sum of the transfer amount and fees, in the currency in which the funds will be transferred;

• The exchange rate used by the provider for the remittance transfer (rounded consistently for each currency to no fewer than two decimal places and no more than four decimal places);

• The amount that will be transferred in the currency in which the funds will be received, but only if covered third-party fees are imposed;

• covered third-party fees (covered third- party fees are any fees imposed on the remittance transfer by a person other than the remittance transfer provider, except for noncovered third-party fees);

• The amount that will be received, in the currency in which the funds will be received; and

• A statement indicating that non- covered third-party fees or taxes col-lected on the remittance transfer by a person other than the provider may apply.

Note: A non-covered third-party fee is any fee imposed by the designated recipient’s

http://www.consumerfinance.gov/remittances-transfer-rule-amendment-to-regulation-e/

http://www.consumerfinance.gov/remittances-transfer-rule-amendment-to-regulation-e/



institution for receiving a transfer into an account except if the institution acts as an agent of the remittance transfer pro-vider.

Receipt disclosure: A provider must also generally provide a written receipt when payment is made for the remittance trans-fer. The written receipt must include:

• All the required pre-payment disclo-sures;

• The date of availability of funds to the designated recipient. A provider may provide the latest date on which funds will be available, along with a statement that funds may be available earlier;

• The name and telephone number and/or address of the designated recipient, if applicable;

• A statement about the rights of the sender regarding the resolution of errors and cancellation. See model form A-37;

• The name, telephone number, and website of the provider; and

• A statement that the sender can con-tact the state agency that regulates the provider and the CFPB for questions or complaints about the provider.

Combined disclosure: A provider may pro-vide both the pre-payment disclosure and receipt in a single disclosure before the pay-ment is made. However, the provider still must provide proof of payment when pay-ment is made for the remittance transfer.

Electronic disclosures: The provider may provide the pre-payment disclosure in electronic form without regard to ESIGN’s

consumer consent provisions. The receipt may also be provided in electronic form, but must comply with ESIGN. In the case of a combined notice, ESIGN also applies.

Foreign language disclosures: Disclosures must generally be provided in English, and in each of the foreign lan-guages that the provider principally uses to advertise, solicit, or market remittances at a particular office (where the sender conducts a transaction or asserts an error); or the foreign language the sender primarily used to conduct the transaction, provided that the language is one of the foreign languages that the provider principally uses to adver-tise, solicit, or market remittance transfer services. If the language used to conduct the transaction is not one of the languages the provider principally uses, the disclo-sures should be in English.

Remittance transfers conducted entirely by telephone:

• Oral pre-payment disclosure — An oral pre-payment disclosure (or via mobile application or text message) is permit-ted if the transaction is conducted entirely by telephone in the language primarily used by the sender. However, a provider must send a required writ-ten receipt (and any error resolution communication) with the same lan-guage used on the telephone, even if it is not a language the provider princi-pally uses.

• Written receipts — For a transac-tion conducted entirely by telephone, a written receipt may be mailed or delivered to the sender no later than 1 business day after the date on which payment is made. For a transaction

http://files.consumerfinance.gov/f/201304_cfpb_model-form_remittance-rule-a-37.pdf

http://files.consumerfinance.gov/f/201304_cfpb_model-form_remittance-rule-a-37.pdf



conducted entirely by telephone and involves the transfer of funds from the sender‘s account held by the provider, the written receipt may be provided on or with the next scheduled periodic statement or within 30 days after pay-ment if a periodic statement is not required.

Estimates on disclosures

A transfer will qualify for estimated information if it meets one of these two exceptions:

• There is a temporary exception for transfers sent from a deposit account at a federally-insured credit union or other depository institution that cannot determine certain disclosed amounts for reasons beyond their control (e.g., international wire transfers). This exception expires on July 21, 2015. The Dodd-Frank Act permits the CFPB to extend this exception for another 5 years, but the statute requires this exemption to expire after 10 years from the enactment of the Dodd-Frank Act (unless the legislation is later amended to extend this exemption).

• There is a permanent exception for international ACH transfers where the provider cannot determine certain amounts to be disclosed because of the laws of a recipient country, or the method by which transactions are made in a recipient country (e.g., the government of a foreign country sets the exchange rate after a transfer, or the exchange rate is set by law when funds are picked up).

Methods of estimation

In disclosing the exchange rate, an estimate must be based on one of the following:

• For international ACH transactions, the most recent exchange rate set by the recipient country‘s central bank and reported by a Federal Reserve Bank;

• The most recent publicly available wholesale exchange rate; or

• The most recent exchange rate offered by the person making funds available directly to the designated recipient.

The estimated exchange rate will also be used to estimate the following:

• Estimated amount in the currency to be received by the designated recipi-ent—This amount should be based on the estimated exchange rate above.

• Estimated other fees by intermedi-aries —A provider should use its most recent remittance to the recipient’s institution or a representative transmit-tal route identified by the provider.

• Estimated other taxes in the recipi-ent country—A provider should use an estimated exchange rate and esti-mated fees from intermediaries to cal-culate the estimated taxes.

• Estimated total to recipient—A pro-vider should disclose the estimated total amount to be received based on the estimated exchange rate, fees, and taxes.

Error resolution

Regulation E requires error resolution rights, standards for resolving errors and



recordkeeping, and cancellation and refund policies for all remittance trans-fers, including those with an estimated exchange rate, fees, and taxes. An “error” includes:

• An incorrect amount paid by a sender in connection with a remittance transfer;

• A computational or bookkeeping error made by the remittance transfer pro-vider relating to a remittance transfer;

• The failure to make available to a des-ignated recipient the amount of cur-rency stated in the disclosure provided to the sender unless:

• the disclosure stated an estimate of the amount received;

• the failure resulted from extraor-dinary circumstances outside the remittance transfer provider‘s control; or

• the difference results from the application of non-covered third-party fees or taxes collected on the remittance transfer by a person other than the provider.

• The failure to make funds available to a designated recipient by the date of availability stated in the disclosure provided to the sender unless the fail-ure resulted from:

• extraordinary circumstances outside the provider‘s control that could not have been reasonably anticipated;

• delays related to the provider‘s fraud screening procedures or BSA, OFAC, or similar requirements;

• the remittance transfer being made with fraudulent intent by the sender

or any person acting in concert with the sender; or

• the sender provided an incorrect account number or recipient insti-tution identifier for the designated recipient’s account or institution (if other conditions are met).

• The sender‘s request for documenta-tion or for additional information or clarification concerning a remittance transfer, including a request a sender makes to determine whether an error exists.

An error does not include:

• An inquiry about the status of a remit-tance transfer, except where the funds from the transfer were not made avail-able to a designated recipient by the disclosed date of availability;

• A request for information for tax or other recordkeeping purposes;

• A change requested by the designated recipient; or

• A change in the amount or type of cur-rency received by the designated recip-ient from the amount or type of cur-rency stated in the disclosure provided to the sender under if the remittance transfer provider relied on information provided by the sender as permitted.

Notice of error: A sender must provide a timely notice of an error to the provider within 180 days of the disclosed date of availability, or within 60 days after receiving additional requested information from the provider. The notice of error must enable the provider to identify the sender (e.g., name, address, or telephone) and the particular remittance transfer, and must also state why



the sender believes an error exists.

Time limit and extent of investigation: A provider must investigate the claim and correct any error within 90 days after sender provides a notice of error. The provider must report the results to the sender, including notice of any remedies available for correct-ing an error, within 3 business days after completing its investigation.

Remedies: Generally, if the provider determines an error occurred, the provider should correct the error, within 1 business day or as soon as reasonably practicable, by refunding the amount of funds in con-nection with a remittance transfer not properly transmitted or other appropri-ate amount, or making available, without additional cost, an appropriate amount to resolve the error and refunding any fees if the error was based on funds avail-ability. Credit unions should review sec-tion 1005.33(c)(2) for specific remedies depending on the type of error.

Results of investigation: If a provider determines that no error occurred or that another type of error occurred, the provider should provide a written explanation of its findings, note the sender‘s right to request the documents that the provider relied on, and respond to the specific complaint. Upon the sender‘s request, the provider should promptly provide copies of the documents on which the provider relied in making its error determination.

Recordkeeping: A provider must develop and maintain written policies and proce-dures designed to ensure compliance with the error resolution requirements. The provider must also take steps designed to ensure that an agent complies with the policies and procedures. With respect to

record retention, a provider must retain any notices of error and documentation from the sender, and findings of the pro-vider. A provider does not have to maintain records of individual disclosures to each sender but does need to retain records that will help the sender determine if an error exists. A provider should retain documen-tation, including documentation related to error investigations, for a period of not less than 2 years.

Reassertion of error: A provider that has fully complied with the error resolution requirements has no further responsibili-ties should the sender later reassert the same error, unless there is new information. The provider has no further error resolution responsibilities if the sender voluntarily withdraws the notice. However, a sender who has withdrawn a notice of error has the right to reassert the allegation unless the provider had already complied with all of the error resolution requirements.

Relation to other laws regarding error resolution: If the sender provides an EFT error notice to the account-holding institu-tion, the institution must comply with:

• Remittance transfer error resolution requirements if the institution is also the remittance transfer provider; or

• Regulation E’s standard error resolu-tion provisions if is not also the remit-tance transfer provider.

• Regulation Z, if an alleged error involves an extension of credit (e.g., member used credit card to pay for remittance transfer).

Unauthorized remittances

Regulation E’s provisions regard-



ing the liability of the consumer for unauthorized transfers will apply to the account-holding institution in connec-tion with a remittance and Regulation Z’s provisions will apply to a creditor in connection with an unauthorized use of a credit card.

Cancellation and refund procedures

A sender may provide an oral or writ-ten request to cancel a remittance trans-fer no later than 30 minutes from pay-ment in connection with the remittance transfer, provided that the provider could identify the particular transfer and the transferred funds have not been received or deposited into the recipient‘s account. The 30 minute requirement must be pro-vided regardless of the provider‘s normal business hours. A provider must refund the total amount of funds, including all fees (including any fees from third-par-ties), within 3 business days and may not charge an additional fee for the refund.

Liability due to actions of agents

A provider is liable for any violation under the final rule by an agent when an agent acts for the provider. The EFTA provides that enforcement agencies may consider, in any action or other proceed-ing against a provider, the extent to which the provider had established and maintained policies or procedures for compliance, including policies, proce-dures, or other appropriate oversight.

Transfers scheduled in advance

For transfers scheduled in advance, including preauthorized transfers, the remittance transfer rule has different tim-ing and disclosure requirements.

Transfers scheduled in advance and the first transfer is a series of preau-thorized transfers

Pre-payment disclosures and receipts for one-time transfers scheduled five or more business days before the date of transfer and the first in a series of pre-authorized remittance transfers are to be provided in the same manner as they are provided for all other remittance transfers.

Estimates–Certain estimated informa-tion may be used on the pre-payment dis-closure and receipt for a one-time trans-fer scheduled five or more business days in advance and the first in a series of pre-authorized remittance transfers. However, if a remittance transfer provider uses estimates on the pre-payment disclosure or receipt, it must provide the sender with an additional receipt with accurate figures, which generally must be provided no later than one business day after the date on which the transfer is made.

Subsequent transfers in series of preauthorized transfers

Receipt – Although a pre-payment disclosure is not required for a subse-quent transfer in a series of preautho-rized transfers, if certain information becomes inaccurate, an updated receipt must be sent within a reasonable time prior to the scheduled date of the next subsequent transfer. This updated receipt may also contain estimated infor-mation; however, if estimates are pro-vided, another updated, accurate receipt generally must be mailed or delivered no later than one business day after the date of the transfer.

Additional Disclosures – For subse-quent preauthorized remittance transfers,



the remittance transfer provider must disclose the date or dates (identified as the “future transfer date(s)”) on which the provider will make the subsequent trans-fers in the series, along with certain other information including a statement about the rights of the sender regarding cancel-lation.

This “future transfer date(s)” disclo-sure must be received by the sender no more than 12 months and no less than 5 business days prior to the date of any subsequent transfer to which it pertains. However, if the date of transfer is four or fewer business days after payment is made for the transfer, the future transfer dates must be provided on or with the receipt given for the first transfer in the series of preauthorized transfers.

Cancellation and Refund Disclosures–For any transfer scheduled at least three business days before the transfer date, including preauthorized remittance trans-fers, the sender must notify the remit-tance transfer provider either orally or in writing at least three business days before the scheduled date of the transfer to can-cel the transfer.

RESOURCES

The CFPB has additional resources that will assist with compliance. The resources include:• A compliance guide • A compliance video • The safe harbor countries list

http://files.consumerfinance.gov/f/201408_cfpb_compliance-guide_intl-money-transfer-small-entity-compliance-guide.pdf

http://www.youtube.com/watch?v=fh3TGcXIC4I

http://files.consumerfinance.gov/f/201209_CFPB_Remittance-Rule-Safe-Harbor-Countries-List.pdf



Appendix 3-A

EFT Agreement and Disclosure

© CUNA Mutual Group 2008-10, 12-14 All Rights Reserved 123-4567-8 (510028)-e

ELECTRONIC FUND TRANSFERS AGREEMENT AND DISCLOSURE This Electronic Fund Transfers Agreement and Disclosure is the contract which covers your and our rights and responsibilities concerning the electronic fund transfers (EFT) services offered to you by ABC Credit Union (“Credit Union”). In this Agreement, the words “you,” “your,” and “yours” mean those who sign the application or account card as applicants, joint owners, or any authorized users. The words “we,” “us,” and “our” mean the Credit Union. The word “account” means any one (1) or more share and share draft accounts you have with the Credit Union. Electronic fund transfers are electronically initiated transfers of money from your account through the EFT services described below. By signing an application or account card for EFT services, signing your card, or using any service, each of you, jointly and severally, agree to the terms and conditions in this Agreement and any amendments for the EFT services offered. Furthermore, electronic fund transfers that meet the definition of remittance transfers are governed by 12 C.F.R. part 1005, subpart B—Requirements for remittance transfers, and consequently, terms of this agreement may vary for those types of transactions. A “remittance transfer” is an electronic transfer of funds of more than $15.00 which is requested by a sender and sent to a designated recipient in a foreign country by a remittance transfer provider. Terms applicable to such transactions may vary from those disclosed herein and will be disclosed to you at the time such services are requested and rendered in accordance with applicable law.

1. EFT SERVICES — If approved, you may conduct any one (1) or more of the EFT services offered by the Credit Union.

a. ATM Card. If approved, you may use your card and personal identification number (PIN) in automated teller machines (ATMs) of the Credit Union, Cirrus networks, and such other machines or facilities as the Credit Union may designate. For ATM transactions, you must consent to the Credit Union’s overdraft protection plan in order for the transaction amount to be covered under the plan. Without your consent, the Credit Union may not authorize and pay an overdraft resulting from these types of transactions. Services and fees for ATM overdrafts are shown in the document the Credit Union uses to capture the member’s opt-in choice for overdraft protection and the Schedule of Fees and Charges.

At the present time, you may use your card to:

- Make deposits to your share and share draft accounts. - Withdraw funds from your share and share draft accounts. - Transfer funds from your share and share draft accounts. - Obtain balance information for your share and share draft accounts. - Make loan payments from your share and share draft accounts. - Make point-of-sale (POS) transactions with your card and personal identification number (PIN) to purchase goods or

services at POS terminals that carry Cirrus network logo(s). - Line of Credit

The following limitations on ATM Card transactions may apply:

- There is no limit on the number of cash withdrawals you may make in any one (1) day. - You may withdraw up to a maximum of $305.00 in any one (1) day, if there are sufficient funds in your account. - There is no limit on the number of POS transactions you may make in any one (1) day. - You may purchase up to a maximum of $305.00 from POS terminals per day, if there are sufficient funds in your account. - For security purposes, there are other limits on the frequency and amount of transfers available at ATMs. - You may transfer up to the available balance in your accounts at the time of the transfer. - See Section 2 for transfer limitations that may apply to these transactions.

Because of the servicing schedule and processing time required in ATM operations, there may be a delay between the time a deposit (either cash or check) is made and when it will be available for withdrawal.

b. Debit Card. If approved, you may use your card to purchase goods and services from participating merchants. However, you may not use your card to initiate any type of gambling transaction. If you wish to pay for goods or services over the Internet, you may be required to provide card number security information before you will be permitted to complete the transaction. You agree that you will not use your card for any transaction that is illegal under applicable federal, state, or local law. Funds to cover your card purchases will be deducted from your share draft account. For one-time debit card transactions, you must consent to the Credit Union’s overdraft protection plan in order for the transaction amount to be covered under the plan. Without your consent, the Credit Union may not authorize and pay an overdraft resulting from these types of transactions. Services and fees for overdrafts are shown in the document the Credit Union uses to capture the member’s opt-in choice for overdraft protection and the Schedule of Fees and Charges.

For other types of transactions, if the balance in your account is not sufficient to pay the transaction amount, the Credit Union may pay the amount and treat the transaction as a request to transfer funds from other deposit accounts, approved overdraft protection accounts, or loan accounts that you have established with the Credit Union. If you initiate a transaction that overdraws your account, you agree to make immediate payment of any overdrafts together with any service charges to the Credit Union. In the event of repeated overdrafts, the Credit Union may terminate all services under this Agreement. You may

© CUNA Mutual Group 2008-10, 12 All Rights Reserved Custom# (51002* EFT004)-e

ELECTRONIC FUND TRANSFERS AGREEMENT AND DISCLOSURE This Electronic Fund Transfers Agreement and Disclosure is the contract which covers your and our rights and responsibilities concerning the electronic fund transfers (EFT) services offered to you by ABC Credit Union (“Credit Union”). In this Agreement, the words “you,” “your,” and “yours” mean those who sign the application or account card as applicants, joint owners, or any authorized users. The words “we,” “us,” and “our” mean the Credit Union. The word “account” means any one (1) or more share and share draft accounts you have with the Credit Union. Electronic fund transfers are electronically initiated transfers of money from your account through the EFT services described below. By signing an application or account card for EFT services, signing your card, or using any service, each of you, jointly and severally, agree to the terms and conditions in this Agreement and any amendments for the EFT services offered. Furthermore, electronic fund transfers that meet the definition of remittance transfers are governed by 12 C.F.R. part 1005, subpart B—Requirements for remittance transfers, and consequently, terms of this agreement may vary for those types of transactions. A “remittance transfer” is an electronic transfer of funds of more than $15.00 requested by a sender to a designated recipient in a foreign country that is sent by a remittance transfer provider. Terms applicable to such transactions may vary from those disclosed herein and will be disclosed to you at the time such services are requested and rendered in accordance with applicable law.

1. EFT SERVICES — If approved, you may conduct any one (1) or more of the EFT services offered by the Credit Union.

a. ATM Card. If approved, you may use your card and personal identification number (PIN) in automated teller machines (ATMs) of the Credit Union, Cirrus networks, and such other machines or facilities as the Credit Union may designate. For ATM transactions, you must consent to the Credit Union’s overdraft protection plan in order for the transaction amount to be covered under the plan. Without your consent, the Credit Union may not authorize and pay an overdraft resulting from these types of transactions. Services and fees for ATM overdrafts are shown in the document the Credit Union uses to capture the member’s opt-in choice for overdraft protection and the Schedule of Fees and Charges.

At the present time, you may use your card to:

- Make deposits to your share and share draft accounts. - Withdraw funds from your share and share draft accounts. - Transfer funds from your share and share draft accounts. - Obtain balance information for your share and share draft accounts. - Make loan payments from your share and share draft accounts. - Make point-of-sale (POS) transactions with your card and personal identification number (PIN) to purchase goods or services at

POS terminals that carry Cirrus network logo(s).

The following limitations on ATM Card transactions may apply:

- There is no limit on the number of cash withdrawals you may make in any one (1) day. - You may withdraw up to a maximum of $300.00 in any one (1) day, if there are sufficient funds in your account. - You may purchase up to a maximum of $1,500.00 from POS terminals per day, if there are sufficient funds in your account. - You may transfer up to the available balance in your accounts at the time of the transfer. - See Section 2 for transfer limitations that may apply to these transactions.

Because of the servicing schedule and processing time required in ATM operations, there may be a delay between the time a deposit (either cash or check) is made and when it will be available for withdrawal.

b. Visa Debit Card. If approved, you may use your card to purchase goods and services from participating merchants. However, you may not use your card to initiate any type of gambling transaction. If you wish to pay for goods or services over the Internet, you may be required to provide card number security information before you will be permitted to complete the transaction. You agree that you will not use your card for any transaction that is illegal under applicable federal, state, or local law. Funds to cover your card purchases will be deducted from your Share Draft account. For one-time debit card transactions, you must consent to the Credit Union’s overdraft protection plan in order for the transaction amount to be covered under the plan. Without your consent, the Credit Union may not authorize and pay an overdraft resulting from these types of transactions. Services and fees for overdrafts are shown in the document the Credit Union uses to capture the member’s opt-in choice for overdraft protection and the Schedule of Fees and Charges.

For other types of transactions, if the balance in your account is not sufficient to pay the transaction amount, the Credit Union may pay the amount and treat the transaction as a request to transfer funds from other deposit accounts, approved overdraft protection accounts, or loan accounts that you have established with the Credit Union. If you initiate a transaction that overdraws your account, you agree to make immediate payment of any overdrafts together with any service charges to the Credit Union. In the event of repeated overdrafts, the Credit Union may terminate all services under this Agreement. You may use your card and personal identification number (PIN) in ATMs of the Credit Union, Cirrus networks, and such other machines or facilities as the Credit Union may designate. In addition, you may use your card without a PIN for certain transactions on the Visa Cirrus networks. However, provisions of this Agreement relating to Visa transactions do not apply to transactions processed through non-Visa networks. To initiate a Visa Debit transaction, you may sign a receipt, provide a card number or swipe your card through a point-of-sale (POS) terminal and choose to route the transaction over a Visa network. Please refer to the Member Liability section of this Agreement for terms and conditions.

At the present time, you may also use your card to:

- Make deposits to your share draft, savings, club, and certificate accounts.



123-4567-8 (510028)-e

use your card and personal identification number (PIN) in ATMs of the Credit Union, PLUS, Cirrus, and CU24 networks, and such other machines or facilities as the Credit Union may designate. In addition, you may use your card without a PIN for certain transactions on the Visa or MasterCard, Cirrus, and CU24 networks. However, provisions of this Agreement relating to Visa or MasterCard transactions do not apply to transactions processed through non-Visa or MasterCard networks. To initiate a Visa or MasterCard Debit transaction, you may sign a receipt, provide a card number or swipe your card through a point-of-sale (POS) terminal and choose to route the transaction over a Visa or MasterCard network. Please refer to the Member Liability section of this Agreement for terms and conditions.


- Make deposits to your share and share draft accounts. - Withdraw funds from your share and share draft accounts. - Transfer funds from your share and share draft accounts. - Obtain balance information for your share and share draft accounts. - Make loan payments from your share and share draft accounts. - Access your Line of Credit accounts. - Make point-of-sale (POS) transactions with your card and personal identification number (PIN) to purchase goods or

services at merchants that accept Visa and MasterCard. - Order goods or services by mail or telephone from places that accept Visa and MasterCard.

The following limitations on Debit Card transactions may apply:

- There is no limit on the number of Debit Card purchases you make per day. - Purchase amounts are limited to the amount in your account. - You may purchase up to a maximum of $2,500.00 per day. - There is no limit to the number of cash withdrawals you may make in any one (1) day from an ATM machine. - You may withdraw up to a maximum of $505.00 in any one (1) day from an ATM machine, if there are sufficient funds in

your account. - There is no limit on the number of POS transactions you may make in any one (1) day. - You may purchase up to a maximum of $505.00 from POS terminals per day, if there are sufficient funds in your account. - For security purposes, there are other limits on the frequency and amount of transfers available at ATMs. - You may transfer up to the available balance in your accounts at the time of the transfer. - See Section 2 for transfer limitations that may apply to these transactions.

c. Health Savings Account (HSA) Debit Card. If you will be using your debit card to access a Health Savings Account (HSA), portions of this Agreement governed by Regulation E will not apply. A HSA account is defined by the IRS as a trust account, and therefore is not covered under Reg E. But portions of this Agreement such as Visa “0” liability for unauthorized use for example, do apply. Funds to cover your card purchases will be deducted from your Health Savings Checking account. You may use your card and personal identification number (PIN) in ATMs of the Credit Union, PLUS, Cirrus, and CU 24 networks, and such other machines or facilities as the Credit Union may designate. In addition, you may use your card without a PIN for certain transactions on the Visa or MasterCard networks. However, provisions of this Agreement relating to Visa or MasterCard transactions do not apply to transactions processed through non-Visa or MasterCard networks. To initiate a Visa or MasterCard Debit transaction, you may sign a receipt, provide a card number or swipe your card through a point-of-sale (POS) terminal and choose to route the transaction over a Visa or MasterCard network. Please refer to the Member Liability section of this Agreement for terms and conditions.


- Make deposits to your Health Savings Checking accounts. - Withdraw funds from your Health Savings Checking accounts. - Transfer funds from your Health Savings Checking Health Savings Checking accounts. - Obtain balance information for your Health Savings Checking accounts. - Make point-of-sale (POS) transactions with your card and personal identification number (PIN) to purchase goods or

services at merchants that accept Visa and MasterCard. - Order goods or services by mail or telephone from places that accept Visa and MasterCard.

The following limitations on Health Savings Account (HSA) Debit Card transactions may apply:

- There is no limit on the number of Health Savings Account (HSA) Debit Card purchases you make per day. - Purchase amounts are limited to the amount in your account. - You may purchase up to a maximum of $500.00 per day. - There is no limit to the number of cash withdrawals you may make in any one (1) day from an ATM machine. - You may withdraw up to a maximum of $305.00 in any one (1) day from an ATM machine, if there are sufficient funds in

your account. - There is no limit on the number of POS transactions you may make in any one (1) day. - You may purchase up to a maximum of $305.00 from POS terminals per day, if there are sufficient funds in your account. - For security purposes, there are other limits on the frequency and amount of transfers available at ATMs. - You may transfer up to the available balance in your accounts at the time of the transfer. - See Section 2 for transfer limitations that may apply to these transactions.



123-4567-8 (510028)-e

d. Audio Teller. If we approve Audio Teller for your accounts, a separate personal identification number (PIN) will be assigned to you. You must use your personal identification number (PIN) along with your account number to access your accounts. At the present time, you may use Audio Teller to:

- Withdraw funds from your share and share draft accounts. - Transfer funds from your share and share draft accounts. - Obtain balance information for your share, share draft, loan, IRA, money market, club, and certificate accounts. - Make loan payments from your share and share draft accounts. - Access your Line of Credit account. - Make bill payments to preauthorized creditors. - Determine if a particular item has cleared. - Obtain tax information on amounts earned on share and share draft accounts or interest paid on loan accounts. - Verify the last date and amount of your payroll deposit.

Your accounts can be accessed under Audio Teller via a touch-tone telephone only. Audio Teller service will be available for your convenience 24 hours per day. This service may be interrupted for a short time each day for data processing.

The following limitations on Audio Teller transactions may apply:

- There is no limit to the number of inquiries, transfers, or withdrawal requests you may make in any one (1) day. - There is a limit of 5 transactions per call and certain limits on the account history information available. - The maximum withdrawal or transfer amount is $5,000.00 per day and no transfer or withdrawal may exceed the available

funds in your account. - See Section 2 for transfer limitations that may apply to these transactions.

The Credit Union reserves the right to refuse any transaction which would draw upon insufficient funds, exceed a credit limit, lower an account below a required balance, or otherwise require us to increase our required reserve on the account. All checks are payable to you as a primary member and will be mailed to your address of record. The Credit Union may set other limits on the amount of any transaction, and you will be notified of those limits. The Credit Union may refuse to honor any transaction for which you do not have sufficient available verified funds. The service will discontinue if no transaction is entered after numerous unsuccessful attempts to enter a transaction and there may be limits on the duration of each telephone call.

e. Preauthorized EFTs.

- Direct Deposit. Upon instruction of (i) your employer, (ii) the Treasury Department or (iii) other financial institutions, the Credit Union will accept direct deposits of your paycheck or federal recurring payments, such as Social Security, to your share and/or share draft account.

- Preauthorized Debits. Upon instruction, we will pay certain recurring transactions from your share and share draft account.

- See Section 2 for transfer limitations that may apply to these transactions. - Stop Payment Rights. If you have arranged in advance to make electronic fund transfers out of your account(s) for

money you owe others, you may stop payment on preauthorized transfers from your account. You must notify us orally or in writing at any time up to three (3) business days before the scheduled date of the transfer. We may require written confirmation of the stop payment order to be made within 14 days of any oral notification. If we do not receive the written confirmation, the oral stop payment order shall cease to be binding 14 days after it has been made. A stop payment request may apply to a single transfer, multiple transfers, or all future transfers as directed by you, and will remain in effect unless you withdraw your request or all transfers subject to the request have been returned.

- Notice of Varying Amounts. If these regular payments may vary in amount, the person you are going to pay is required to tell you, ten (10) days before each payment, when it will be made and how much it will be. You may choose instead to get this notice only when the payment would differ by more than a certain amount from the previous payment or when the amount would fall outside certain limits that you set.

- Liability for Failure to Stop Payment of Preauthorized Transfers. If you order us to stop payment of a preauthorized transfer three (3) business days or more before the transfer is scheduled and we do not do so, we will be liable for your losses or damages.

f. Electronic Check Conversion/Electronic Returned Check Fees. If you pay for purchases or bills with a check or draft, you may authorize your check or draft to be converted to an electronic fund transfer. You may also authorize merchants or other payees to electronically debit your account for returned check fees. You are considered to have authorized these electronic fund transfers if you complete the transaction after being told (orally or by a notice posted or sent to you) that the transfer may be processed electronically or if you sign a written authorization.

g. Online Banking. If Online Banking is activated for your account(s), you will be required to use secure login information to access the account(s). At the present time, you may use Online Banking to:

- Withdraw funds from your share and share draft accounts. - Transfer funds from your share and share draft accounts. - Obtain balance information for your share and share draft accounts. - Make loan payments from your share and share draft accounts. - Access your Line of Credit accounts. - Determine if a particular item has cleared.



123-4567-8 (510028)-e

- Obtain tax information on amounts earned on share and share draft accounts or interest paid on loan accounts. - Verify the last date and amount of your payroll deposit. - Make bill payments to preauthorized creditors.

Your accounts can be accessed under Online Banking via personal computer. Online Banking will be available for your convenience 24 hours per day. This service may be interrupted for a short time each day for data processing. We reserve the right to refuse any transaction which would draw upon insufficient funds, exceed a credit limit, lower an account below a required balance, or otherwise require us to increase our required reserve on the account. All checks are payable to you as a primary member and will be mailed to your address of record. We may set other limits on the amount of any transaction, and you will be notified of those limits. We may refuse to honor any transaction for which you do not have sufficient available verified funds. The service will discontinue if no transaction is entered after numerous unsuccessful attempts to enter a transaction and there may be limits on the duration of each access.

The following limitations on Online Banking transactions may apply:

- There is no limit to the number of inquiries, transfers, or withdrawal requests you may make in any one (1) day. - The maximum withdrawal or transfer amount is $9,999.99 per day, and no transfer or withdrawal may exceed the

available funds in your account. - See Section 2 for transfer limitations that may apply to these transactions.

h. Mobile Banking. If Mobile Banking is activated for your account(s), you will be required to use secure login information to access the account(s). At the present time, you may use Mobile Banking to:

- Withdraw funds from your share and share draft accounts. - Transfer funds from your share and share draft accounts. - Obtain balance information for your share, share draft, loan, IRA, money market, club, and certificate accounts. - Make loan payments from your share and share draft accounts. - Access your Line of Credit accounts. - Determine if a particular item has cleared. - Obtain tax information on amounts earned on share and share draft accounts or interest paid on loan accounts. - Verify the last date and amount of your payroll deposit. - Make bill payments to preauthorized creditors.

Your accounts can be accessed under Mobile Banking via mobile device or other approved access device(s). Mobile Banking will be available for your convenience 24 hours per day. This service may be interrupted for a short time each day for data processing. We reserve the right to refuse any transaction which would draw upon insufficient funds, exceed a credit limit, lower an account below a required balance, or otherwise require us to increase our required reserve on the account. All checks are payable to you as a primary member and will be mailed to your address of record. We may set other limits on the amount of any transaction, and you will be notified of those limits. We may refuse to honor any transaction for which you do not have sufficient available verified funds. The service will discontinue if no transaction is entered after numerous unsuccessful attempts to enter a transaction and there may be limits on the duration of each access.

The following limitations on Mobile Banking transactions may apply:

- There is no limit to the number of inquiries, transfers, or withdrawal requests you may make in any one (1) day. - The maximum withdrawal or transfer amount is $9,999.99 per day, and no transfer or withdrawal may exceed the

available funds in your account. - See Section 2 for transfer limitations that may apply to these transactions.

i. Bill Payment. We will process bill payment transfer requests only to those creditors the Credit Union has designated in the User Instructions and such creditors as you authorize and for whom the Credit Union has the proper vendor code number. We will not process any bill payment transfer if the required transaction information is incomplete.

We will withdraw the designated funds from your share draft account for bill payment transfer by the designated cutoff time on the date you schedule for payment. We will process your bill payment transfer within a designated number of days before the date you schedule for payment. You must allow sufficient time for vendors to process your payment after they receive a transfer from us. Please leave as much time as though you were sending your payment by mail. We cannot guarantee the time that any payment will be credited to your account by the vendor.

The following limitations on Bill Payment transactions may apply:

- There is no limit on the number of bill payments per day. - The maximum amount of bill payments each day is $9,999.99, if there are sufficient funds in your account.

2. TRANSFER LIMITATIONS — For all share accounts, you may make no more than six (6) transfers and withdrawals from your account to another account of yours or to a third party in any month by means of a preauthorized, automatic, or Internet transfer, by telephonic order or instruction, or by check, draft, debit card or similar order. If you exceed these limitations, your account may be subject to a fee or be closed.



123-4567-8 (510028)-e

3. CONDITIONS OF EFT SERVICES —

a. Ownership of Cards. Any card or other device which we supply to you is our property and must be returned to us, or to any person whom we authorize to act as our agent, or to any person who is authorized to honor the card, immediately according to instructions. The card may be repossessed at any time at our sole discretion without demand or notice. You cannot transfer your card or account to another person.

b. Honoring the Card. Neither we nor merchants authorized to honor the card will be responsible for the failure or refusal to honor the card or any other device we supply to you. If a merchant agrees to give you a refund or adjustment, you agree to accept a credit to your account in lieu of a cash refund.

c. Foreign Transactions. - Visa. Purchases and cash withdrawals made in foreign currencies will be debited from your account in U.S. dollars. The

exchange rate between the transaction currency and the billing currency used for processing international transactions is a rate selected by Visa from a range of rates available in wholesale currency markets for the applicable central processing date, which rate may vary from the rate Visa itself receives or the government-mandated rate in effect for the applicable central processing date. The exchange rate used on the processing date may differ from the rate that would have been used on the purchase date or cardholder statement posting date.

A fee of 1.00% of the amount of the transaction, calculated in U.S. dollars, will be imposed on all multiple currency foreign transactions, including purchases, cash withdrawals and credits to your account. A fee of 0.80% of the amount of the transaction, calculated in U.S. dollars, will be imposed on all single currency foreign transactions, including purchases, cash withdrawals and credits to your account. A foreign transaction is any transaction that you complete or a merchant completes on your card outside of the United States, with the exception of U.S. military bases, U.S. territories, U.S. embassies or U.S. consulates.

- MasterCard. Purchases and cash withdrawals made in foreign currencies will be debited from your account in U.S. dollars. The exchange rate used to convert foreign currency transactions to U.S. dollars is either a government-mandated exchange rate or a wholesale exchange rate and is selected by MasterCard. The rate MasterCard uses for a particular transaction is the rate MasterCard selects for the applicable currency on the day the transaction is processed. This rate may differ from the rate applicable on the date the transaction occurred or was posted to your account.

A fee of up to 1.00% will be charged on all transactions completed outside of the United States, where the cardholder’s country code differs from the merchant’s country code. All fees are calculated based on the transaction amount after it is converted to U.S. dollars. These fees are charged except where excluded.

d. Security of Access Code. You may use one (1) or more access codes with your electronic fund transfers. The access codes issued to you are for your security purposes. Any access codes issued to you are confidential and should not be disclosed to third parties or recorded on or with the card. You are responsible for safekeeping your access codes. You agree not to disclose or otherwise make your access codes available to anyone not authorized to sign on your accounts. If you authorize anyone to use your access codes, that authority shall continue until you specifically revoke such authority by notifying the Credit Union. You understand that any joint owner you authorize to use an access code may withdraw or transfer funds from any of your accounts. If you fail to maintain the security of these access codes and the Credit Union suffers a loss, we may terminate your EFT services immediately.

e. Joint Accounts. If any of your accounts accessed under this Agreement are joint accounts, all joint owners, including any authorized users, shall be bound by this Agreement and, alone and together, shall be responsible for all EFT transactions to or from any share and share draft or loan accounts as provided in this Agreement. Each joint account owner, without the consent of any other account owner, may, and is hereby authorized by every other joint account owner, make any transaction permitted under this Agreement. Each joint account owner is authorized to act for the other account owners, and the Credit Union may accept orders and instructions regarding any EFT transaction on any account from any joint account owner.

4. FEES AND CHARGES — There are certain fees and charges for EFT services. For a current listing of all applicable fees, see our current Schedule of Fees and Charges that was provided to you at the time you applied for or requested these electronic services. From time to time, the charges may be changed. We will notify you of any changes as required by applicable law.

If you use an ATM not operated by us, you may be charged a fee by the ATM operator and by any international, national, regional, or local network used in processing the transaction (and you may be charged a fee for a balance inquiry even if you do not complete a funds transfer). The ATM surcharge will be debited from your account if you elect to complete the transaction or continue with the balance inquiry.

5. MEMBER LIABILITY —

Visa Liability. You are responsible for all transactions you authorize using your EFT services under this Agreement. If you permit someone else to use an EFT service, your card or your access code, you are responsible for any transactions they authorize or conduct on any of your accounts.

TELL US AT ONCE if you believe your card or access code has been lost or stolen, if you believe someone has used your card or access code or otherwise accessed your accounts without your authority, or if you believe that an electronic fund transfer has been made without your permission using information from your check. Telephoning is the best way of keeping



123-4567-8 (510028)-e

your possible losses down. You could lose all the money in your account (plus your maximum overdraft line-of-credit). If a transaction was made with your card or card number without your permission and was a Visa transaction, you will have no liability for the transaction, unless you were grossly negligent in the handling of your account or card or access code. For all other EFT transactions, if you were grossly negligent in the handling of your account or card or access code, your liability for an unauthorized transaction is determined as follows.

If you tell us within two (2) business days after you learn of the loss or theft of your card or access code, you can lose no more than $50.00 if someone used your card or access code without your permission. If you do NOT tell us within two (2) business days after you learn of the loss or theft of your card or access code and we can prove we could have stopped someone from using your card or access code without your permission if you had told us, you could lose as much as $500.00.

MasterCard Liability. You are responsible for all transactions you authorize using your EFT services under this Agreement. If you permit someone else to use an EFT service, your card or your access code, you are responsible for any transactions they authorize or conduct on any of your accounts. However, TELL US AT ONCE if you believe your card and/or access code has been lost or stolen, if you believe someone has used your card or access code or otherwise accessed your accounts without your permission, or if you believe that an electronic fund transfer has been made without your permission using information from your check. Telephoning is the best way of keeping your possible losses down. You could lose all the money in your account (plus your maximum overdraft line-of-credit).

You are not liable for an unauthorized MasterCard debit card transaction if you can demonstrate that you have exercised reasonable care in protecting your card or access code from loss or theft and, upon discovering the loss or theft, you promptly report the loss or theft to us.

For all other EFT transactions involving access devices, your liability for unauthorized transactions is determined as follows. If you tell us within two (2) business days after you learn of the loss or theft of your card or access code, you can lose no more than $50.00 if someone used your card or access code without your permission. If you do NOT tell us within two (2) business days after you learn of the loss or theft of your card or access code and we can prove that we could have stopped someone from using your card or access code without your permission if you had told us, you could lose as much as $500.00.

Also, if your statement shows transfers that you did not make including those made by card, access code or other means, TELL US AT ONCE. If you do not tell us within 60 days after the statement was mailed to you, you may not get back any money lost after the 60 days if we can prove that we could have stopped someone from making the transfers if you had told us in time. If a good reason (such as a hospital stay) kept you from telling us, we will extend the time periods.

If you believe your card or access code has been lost or stolen or that someone has transferred or may transfer money from your accounts without your permission, call:

(123) 111-1111

or write to:

ABC Credit Union 123 Any St. Testing, CA 12345

You should also call the number or write to the address listed above if you believe a transfer has been made using the information from your check without your permission.

6. RIGHT TO RECEIVE DOCUMENTATION —

a. Periodic Statements. Transfers and withdrawals made through any ATM or POS terminal, debit card transactions, HSA debit card transactions, audio response transactions, preauthorized EFTs, online/PC transactions, mobile access device transactions or bill payments you make will be recorded on your periodic statement. You will receive a statement monthly unless there is no transaction in a particular month. In any case, you will receive a statement at least quarterly.

b. Terminal Receipt. You can get a receipt at the time you make any transaction (except inquiries) involving your account using an ATM and/or point-of-sale (POS) terminal.

c. Direct Deposit. If you have arranged to have a direct deposit made to your account at least once every 60 days from the same source and you do not receive a receipt (such as a pay stub), you can find out whether or not the deposit has been made by calling (123) 111-1111. This does not apply to transactions occurring outside the United States.

7. ACCOUNT INFORMATION DISCLOSURE — We will disclose information to third parties about your account or the transfers you make:

- As necessary to complete transfers; - To verify the existence of sufficient funds to cover specific transactions upon the request of a third party, such as a credit

bureau or merchant; - If your account is eligible for emergency cash and/or emergency card replacement services and you request such

services, you agree that we may provide personal information about you and your account that is necessary to provide you with the requested service(s);



123-4567-8 (510028)-e

- To comply with government agency or court orders; or - If you give us your written permission.

8. BUSINESS DAYS — Our business days are Monday through Friday, excluding holidays.

9. CREDIT UNION LIABILITY FOR FAILURE TO MAKE TRANSFERS — If we do not complete a transfer to or from your account on time or in the correct amount according to our agreement with you, we may be liable for your losses or damages. However, we will not be liable for direct or consequential damages in the following events:

- If, through no fault of ours, there is not enough money in your accounts to complete the transaction, if any funds in your accounts necessary to complete the transaction are held as uncollected funds pursuant to our Funds Availability Policy Disclosure, or if the transaction involves a loan request exceeding your credit limit.

- If you used your card or access code in an incorrect manner. - If the ATM where you are making the transfer does not have enough cash. - If the ATM was not working properly and you knew about the problem when you started the transaction. - If circumstances beyond our control (such as fire, flood, or power failure) prevent the transaction. - If the money in your account is subject to legal process or other claim. - If funds in your account are pledged as collateral or frozen because of a delinquent loan. - If the error was caused by a system of any participating ATM network. - If the electronic transfer is not completed as a result of your willful or negligent use of your card, access code, or any EFT

facility for making such transfers. - If the telephone or computer equipment you use to conduct audio response, online/PC, or mobile banking transactions is

not working properly and you know or should have known about the breakdown when you started the transaction. - If you have bill payment services, we can only confirm the amount, the participating merchant, and date of the bill

payment transfer made by the Credit Union. For any other error or question you have involving the billing statement of the participating merchant, you must contact the merchant directly. We are not responsible for investigating such errors.

- Any other exceptions as established by the Credit Union.

10. NOTICES — All notices from us will be effective when we have mailed them or delivered them to the appropriate address in the Credit Union’s records. Notices from you will be effective when received by the Credit Union at the address specified in this Agreement. We reserve the right to change the terms and conditions upon which this service is offered. We will mail notice to you at least 21 days before the effective date of any change. Use of this service is subject to existing regulations governing the Credit Union account and any future changes to those regulations.

The following information is a list of safety precautions regarding the use of ATMs and night deposit facilities:

- Be aware of your surroundings, particularly at night. - Consider having someone accompany you when the ATM or night deposit facility is used after dark. - Close the entry door of any ATM facility equipped with a door. - If another person is uncomfortably close to you at the time of your transaction, ask the person to step back before you

complete your transaction. If it is after the regular hours of the financial institution and you are using an ATM, do not permit entrance to any person you do not know.

- Refrain from displaying your cash at the ATM or night deposit facility. As soon as your transaction is completed, place your money in your purse or wallet. Count the cash later in the safety of your car or home.

- If you notice anything suspicious at the ATM or night deposit facility, consider using another ATM or night deposit facility or coming back later. If you are in the middle of a transaction and you notice something suspicious, cancel the transaction, take your card or deposit envelope, and leave.

- If you are followed after making a transaction, go to the nearest public area where people are located. - Do not write your personal identification number (PIN) or access code on your ATM card. - Report all crimes to law enforcement officials immediately. If emergency assistance is needed, call the police from the

nearest available public telephone.

11. BILLING ERRORS — In case of errors or questions about electronic fund transfers from your share and share draft accounts or if you need more information about a transfer on the statement or receipt, telephone us at the following number or send us a written notice to the following address as soon as you can. We must hear from you no later than 60 days after we sent the FIRST statement on which the problem appears. Call us at:

(123) 111-1111

or write to:

ABC Credit Union 123 Any St. Testing, CA 12345

- Tell us your name and account number. - Describe the electronic transfer you are unsure about and explain, as clearly as you can, why you believe the Credit

Union has made an error or why you need more information. - Tell us the dollar amount of the suspected error.

If you tell us orally, we may require that you send us your complaint or question in writing within ten (10) business days.



123-4567-8 (510028)-e

We will determine whether an error has occurred within ten (10)* business days after we hear from you and will correct any error promptly. If we need more time, however, we may take up to 45** days to investigate your complaint or question. If we decide to do this, we will credit your account within ten (10)* business days for the amount you think is in error so that you will have the use of the money during the time it takes us to complete our investigation. If we ask you to put your complaint or question in writing and we do not receive it within ten (10) business days, we may not credit your account.

We will tell you the results within three (3) business days after completing our investigation. If we decide that there was no error, we will send you a written explanation. You may ask for copies of the documents that we used in our investigation.

* If you give notice of an error within 30 days after you make the first deposit to your account, we will have 20 business days instead of ten (10) business days to investigate the error.

** If you give notice of an error within 30 days after you make the first deposit to your account, notice of an error involving a point-of-sale (POS) transaction, or notice of an error involving a transaction initiated outside the U.S., its possessions and territories, we will have 90 days instead of 45 days to investigate the error.

NOTE: If the error you assert is an unauthorized Visa transaction, other than a cash disbursement at an ATM, we will credit your account within five (5) business days unless we determine that the circumstances or your account history warrant a delay, in which case you will receive credit within ten (10) business days.

12. TERMINATION OF EFT SERVICES — You may terminate this Agreement or any EFT service under this Agreement at any time by notifying us in writing and stopping your use of your card and any access code. You must return all cards to the Credit Union. You also agree to notify any participating merchants that authority to make bill payment transfers has been revoked. We may also terminate this Agreement at any time by notifying you orally or in writing. If we terminate this Agreement, we may notify any participating merchants making preauthorized debits or credits to any of your accounts that this Agreement has been terminated and that we will not accept any further preauthorized transaction instructions. We may also program our computer not to accept your card or access code for any EFT service. Whether you or the Credit Union terminates this Agreement, the termination shall not affect your obligations under this Agreement for any electronic transactions made prior to termination.

13. GOVERNING LAW — This Agreement is governed by the bylaws of the Credit Union, federal laws and regulations, the laws and regulations of the state of California, and local clearinghouse rules, as amended from time to time. Any disputes regarding this Agreement shall be subject to the jurisdiction of the court of the county in which the Credit Union is located.

14. ENFORCEMENT — You are liable to us for any losses, costs or expenses we incur resulting from your failure to follow this Agreement. You authorize us to deduct any such losses, costs or expenses from your account without prior notice to you. If we bring a legal action to collect any amount due under or to enforce this Agreement, we shall be entitled, subject to applicable law, to payment of reasonable attorney’s fees and costs, including fees on any appeal, bankruptcy proceedings, and any postjudgment collection actions.



Appendix 3-B

Model Form for Initial and Annual Error-Resolution Notice per Regulation E §§1005.7(b)(10) and 1005.8(b)

In Case of Errors or Questions About Your Electronic Transfers

Telephone us at [insert telephone number] orWrite us at [insert address]ore-mail us at [insert electronic mail address]

as soon as you can, if you think your statement or receipt is wrong, or if you need more information about a transfer listed on the statement or receipt. We must hear from you no later than 60 days after we send the first statement on which the prob-lem or error appeared.

1. Tell us your name and account number (if any).

2. Describe the error or the transfer you are unsure about, and explain as clearly as you can why you believe it is an error or why you need more information.

3. Tell us the dollar amount of the suspected error.

If you tell us orally, we may require that you send us your complaint or ques-tion in writing within 10 business days.

We will determine whether an error occurred within 10 business days after we hear from you and will correct any error promptly. If we need more time, however, we may take up to 45 days to investigate your complaint or question. If we decide to do this, we will credit your account within 10 business days for the amount you think is in error so that you will have the use of the money dur-ing the time it takes us to complete our investigation. If we ask you to put your complaint or question in writing, and we do not receive it within 10 business days, we may not credit your account.

For errors involving new accounts, point-of-sale, or foreign-initiated transac-tions, we may take up to 90 days to investigate your complaint or questions. For new accounts, we may take up to20 business days to credit your account for the amount you think is in error.

We will tell you the results within three business days after completing our investigation. If we decide that there was no error, we will send you a writ-ten explanation. You may ask for copies of the documents that we used in our investigation.



Appendix 3-C

Model Form for Error-Resolution on Periodic Statements per Regulation E §1005.8(b)

In Case of Errors or Questions About Your Electronic Transfers

Telephone us at [insert telephone number] orWrite us at [insert address]

as soon as you can, if you think your statement or receipt is wrong, or if you need more information about a transfer listed on the statement or receipt. We must hear from you no later than sixty days after we send the first statement on which the problem or error appeared.

1. Tell us your name and account number (if any).

2. Describe the error or the transfer you are unsure about, and explain as clearly as you can why you believe it is an error or why you need more information.

3. Tell us the dollar amount of the suspected error.

We will investigate your complaint and will correct any error promptly. If we take more than ten business days to do this, we will credit your account for the amount you think is in error, so that you will have the use of the money during the time it takes us to complete our investigation.



Appendix 3-D

Automatic Transfer Authorization

© CUNA Mutual Group 1993, 2003, 08 All Rights Reserved D22003-E

Automatic Transfer AuthorizationMember No:

Member/Owner:

Date of Request:

Processed by:

New Update Cancel

I authorize the Credit Union to transfer funds from my account(s) with the following frequency:

Monthly Semi-Monthly Bi-Weekly Weekly Day(s)/Date(s):

Total Amount to Transfer: $ From Account No:

Distribution:

Amount: $ To: Savings/Share Checking/Draft Loan Acct. No./Suffix:



I understand it is my responsibility to maintain a balance in my account to enable the transfer to be made on the specified date. If there are not sufficient funds in the account on the transfer date, available funds will be used to make a partial transfer in any order determined by the Credit Union. The transfers will continue until I notify the Credit Union in writing tocancel or update the transfer or if the Credit Union notifies me the transfer will be discontinued. The Credit Union must receive the written request for cancellation seven (7) business days prior to the transfer.

Signature Date

XSignature Date

X



Regulation E: Electronic Funds Transfer

Quiz/Study Guide

1. Regulation E defines an “electronic funds transfer” as any transfer of funds initiated through certain mediums for the purpose of ordering, instructing, or authorizing a credit union to debit or credit a share draft/checking, share/savings, or other member asset account. What are the four methods for transferring funds provided in this definition?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

2. In order for a member to be held liable for the use of an access device it must be an “accepted access device.” How does Reg E define an “accepted access device”?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

3. Certain automatic transfers are exempt from Reg E. List the four exempt transactions.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

4. When must the credit union provide initial Reg E disclosures to members?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



5. Regulation E requires that specific items be included in the initial disclosure of terms and conditions. List six of them.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

6. What type of changes to EFT services would require the credit union to mail a change in terms notice? When must this notice be mailed?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

7. Before a member can be held liable for a transaction made with an access device as defined by Regulation E, the device must be an “accepted access device.” What are the three ways in which an access device becomes “accepted”?

_____________________________________________________________________

_____________________________________________________________________

8. If your credit union charges a fee to nonmembers who use an ATM you operate, you must disclose (on the screen) the fact that a fee will be charged along with the amount of the fee. What option must be given to the nonmember along with the on-screen fee notice?

_____________________________________________________________________

_____________________________________________________________________



9. What transaction-specific information must appear on the member’s receipt for each EFT transaction made at an electronic terminal?

_____________________________________________________________________

_____________________________________________________________________

10. What are the Regulation E requirements regarding when member periodic statements must be sent?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

11. If a member notices an error in a funds transfer from their account, what are the requirements for reporting that error to the credit union?

_____________________________________________________________________

_____________________________________________________________________

12. What is the time frame for a credit union to investigate a member notification of an EFT error?

_____________________________________________________________________

_____________________________________________________________________

13. What is the credit union’s responsibility if the investigation determines that an error has occurred? Is it different if no error occurred?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

14. If a member notifies the credit union within two business days of discovering a loss or theft of an access device, what is the member’s liability?

_____________________________________________________________________

_____________________________________________________________________



15. Generally an access device can only be issued to a member by a specific request or as a renewal or substitution. Under what four conditions can an unsolicited access device be issued to a member?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

16. An electronic check conversion transaction can only proceed when it has been authorized by the consumer. How does the consumer authorize the transaction?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

17. What can credit unions provide to payroll account card users instead of the customary periodic statement?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

18. A credit union cannot charge a fee on a member’s account for paying an ATM or one-time debit card overdraft, unless the credit union does the following (list the 4-step opt-in requirement):

1) ___________________________________________________________________

2) ___________________________________________________________________

3) ___________________________________________________________________

4) ___________________________________________________________________

19. The gift card provisions prohibit dormancy, inactivity, and service fees on gift cards unless:

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



20. What disclosures are required when a credit union provides remittance transfer services to a consumer?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

21. Disclosures must generally be provided in English, and in each of the foreign languages that the provider principally uses to ____________, _____________, or ____________ remittance transfer services at a particular office where the sender conducts a transaction or asserts an error.

22. A sender of a remittance transfer must provide a timely notice of an error to the provider within ______ days of the disclosed date of availability, or within _____ days after receiving additional requested information from the provider.

The credit union must investigate the claim and correct any error within _____ days after sender provides a notice of error; and report the results to the sender within _____ business days after completing its investigation.

If the credit union determines an error occurred, it should correct the error, within _____ business day or as soon as reasonably practicable.

23. A sender may provide an oral or written request to cancel a remittance transfer no later than _____minutes from payment in connection with the remittance transfer.

24. To cancel a transfer scheduled at least three business days in advance, including a preauthorized transfer, how many days before the date of the transfer must the sender notify the remittance transfer provider that he/she wants to cancel?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



Regulation E: Electronic Funds Transfer

Answer Key

1. Any transfer of funds initiated through 1) an electronic terminal, 2) telephone, 3) computer, or 4) magnetic tape. (Page 3-2)

2. An access device becomes an accepted access device when the member to whom the device was issued: 1) requests and receives, or signs, uses, or authorizes another to use the device in the manner intended, 2) requests validation of an unsolicited access device, or 3) receives an access device that is a renewal or substitution for an accepted access device. (Page 3-3)

3. Transfers: 1) between a member’s accounts at the credit union, 2) from the member’s account to the credit union (loan payments), 3) into the member’s account (crediting a dividend), and 4) to another family member’s account at the credit union. (Page 3-4)

4. When a member contracts for an EFT service on or before the time the EFT service is first used. (Page 3-5)

5. Consumer liability, the credit union’s telephone number and address, the credit union’s business days, the types of transfers and applicable limitations, any fees and charges, the member’s right to documentation, the member’s right to stop payment, confidentiality, the error-resolution procedure notice; the credit union’s liability regarding stop payments; ATM surcharge notice; and electronic check conversions. (Page 3-5 to 3-8)

6. A change in terms notice is required when the credit union changes a term or condition disclosed in the initial disclosure if the change restricts EFT services, increases fees or charges, increases member liability, places stricter limits on the dollar amount or frequency of transfers permitted.

Must be mailed 21 days before the change becomes effective. (Page 3-8)

7. An access device becomes an “accepted access device” when: 1) the member requests and receives, or signs, uses, or authorizes another to use the device in the intended manner, 2) the member validates an unsolicited access device, and 3) the member receives the access device as a renewal or substitution for another accepted access device. (Page 3-3)

8. The nonmember must be given the option of canceling the transaction and no fee can be charged to their account. (Page 3-9)



9. The amount of the transfer; the date of the transfer; the type of transfer and type of account involved; a number or code that uniquely identifies the member, the account, or the access device used; the location of the terminal; name of any third party receiving or sending funds. (Page 3-9)

10. A statement must be sent each month an EFT occurs or quarterly if there is no EFT activity. (Page 3-9)

11. The error notification can be made either orally or in writing and must be made within 60 days of the date of the periodic statement or transmittal containing the error. (Page 3-12)

12. The reported error must be investigated promptly and the results reported to the member within 10 business days (20 business days for new accounts less than 30 days old).

The investigation can take up to 45 days if: 1) the funds are provisionally re-credited to the member’s account by the end of the initial 10 business days, 2) the member is notified of the credit within two business days of the recrediting, 3) the member has full use of the recredited funds during the investigation. (Page 3-12 to 3-13)

13. Within one business day, the credit union must: 1) correct the error, 2) credit any interest due, 3) refund any charges made to the account, and 4) provide an oral or written report of the correction to the member. If there was a provi sional credit made to the account, the member must be notified that the provi sional credit is final within three business days after completing the investigation.

If it is determined that no error occurred or the error was for a different amount or happened in a different manner, the member must be notified in writing within three business days after the investigation is completed. (Page 3-14)

14. The lesser of $50 or the amount of money or property obtained through unauthorized use before the notification was made to the credit union. (Page 3-15)

15. An unsolicited access device can be issued if it: 1) is not validated, 2) is accompanied by a clear explanation that the access device is not validated and how it can be disposed of if the member does not wish to use the device, 3) is accompanied by a complete initial Reg E disclosure, and 4) can be activated only upon the oral or written request of the member and only after verification of the member’s identity. (Page 3-25)



16. A consumer authorizes the transaction when he receives the appropriate notice, and then “goes forward with the transaction.” The notice must tell the consumer that:

• The check will be processed as a one-time EFT; and

• The funds may be debited from the consumer’s account as soon as the same day payment is received, and, as applicable, that the consumer’s check will not be returned by the financial institution holding the account. (Page 3-10)

17. Credit unions can provide the following instead of the customary periodic statement for payroll account card users:

1. Provide access to the account balance through a readily available telephone line;

2. Provide access to an electronic history (such as through a website) of the member’s account transactions that covers at least 60 days preceding the date the member electronically accesses the account (i.e., enters a user identification code or a password or otherwise complies with a security procedure used by an institution to verify a consumer’s identity); and

3. Provide promptly upon the member’s oral or written request, a written history of the member’s account transactions that covers at least 60 days preceding the date of receipt of the request. (Page 3-17)

18. A credit union cannot charge a fee on a member’s account for paying an ATM or one-time debit card overdraft, unless the credit union (list the 4-step opt-in requirement):

1. Provides the member with a notice in writing (or electronically, if the member agrees) segregated from all other information, describing the credit union’s overdraft service(s).

2. Provides a reasonable opportunity for the member to affirmatively consent, or opt in, to the service for ATM and one-time debit card transactions.

3. Obtains the member’s affirmative consent, or opt-in, to the credit union’s payment of ATM or one-time debit card transactions.

4. Provides the member with confirmation of his consent in writing (or electronically, he agrees), which includes a statement informing the member of the right to revoke such consent. (Page 3-20)



19. The gift card provisions prohibit dormancy, inactivity, and service fees on gift cards unless: (Page 3-23)

1. there has been at least one year of inactivity on the card;

2. no more than one such fee is charged per month; and

3. the consumer is given clear and conspicuous disclosures about the fees.

20. Reg E requires the credit union to provide a prepayment disclosure and a receipt, which can be combined into a single disclosure and provided before the payment is made. However, the credit union still must provide proof of payment when payment is made for the remittance transfer. (Page 3-26)

21. Disclosures must generally be provided in English, and in each of the foreign languages that the provider principally uses to advertise, solicit, or market remittances at a particular office where the sender conducts a transaction or asserts an error. (Page 3-27)

22. A sender of a remittance transfer must provide a timely notice of an error to the provider within 180 days of the disclosed date of availability, or within 60 days after receiving additional requested information from the provider.

The credit union must investigate the claim and correct any error within 90 days after sender provides a notice of error; and report the results to the sender within 3 business days after completing its investigation.

If the credit union determines an error occurred, it should correct the error, within 1 business day or as soon as reasonably practicable. (Page 3-29 to 3-30)

23. A sender may provide an oral or written request to cancel a remittance transfer no later than 30 minutes from payment in connection with the remittance transfer. (Page 3-31)

24. For a transfer scheduled at least three business days before the transfer date, a sender must notify the remittance transfer provider at least three business days before the scheduled date of the transfer to cancel the transfer. (Page 3-31)


SECTION 4 – REGULATION CC: AVAILABILITY OF

FUNDS AND COLLECTIONS OF CHECKS


Funds Availability Requirements

The Expedited Funds Availability Act requires that cash deposits, wire trans fers, and certain check deposits that Congress believes pose a low risk of return to the depositary bank, such as U.S. Treasury checks and cashier’s checks, generally be made available for withdrawal on a next-day basis. The time when depositary institutions must make other check deposits available for withdrawal may depend on the type of check or where the check is depos-ited. Congress established a permanent schedule effective Sept. 1, 1990, con-taining specified time frames in which funds from local and nonlocal check deposits must be made available for withdrawal. However, after a number of check processing center restructurings over the past several years, the Fed com-pleted the last restructuring on February 27, 2010, by assigning all check rout-ing numbers to the Cleveland check processing center, thereby eliminating non-local hold periods. All checks are now considered local checks regardless of which bank in the United States or its territories the check was written on. Congress recognized that the specific availability schedules do create a risk for depositary institutions that funds may be withdrawn prior to the return of a check, even with the expeditious return require-ments. Accordingly, several exceptions to the availability schedules were pro-

vided to permit credit unions to extend a hold beyond the statutory schedules. Regulation CC (12 CFR 229) was issued by the Federal Reserve Board (FRB) to implement the Act.

Next-day availability requirements

Credit unions must make funds from certain types of deposits available on a next-day basis. These deposits gener-ally pose a low risk of being returned and thus are required to be available to the member sooner than other types of deposits. Deposits subject to next-day availability include cash, electronic payments, certain government checks, cashier’s checks, teller’s checks, and certified checks, “on-us” checks, and the first $200 of all other checks depos-ited on one day. While there are statu-tory exceptions to the availability sched-ules for local check deposits, the statu-tory exceptions generally do not apply to these type of deposits.

Next-day availability means that funds must be available for withdrawal on the business day after the banking day on which the deposit was made. Each of the next day deposits have some specific rules.

Reg. CC applies to all credit unions. However, the funds availability require-ments of Reg. CC only apply to consum-er and nonconsumer checking accounts. The requirements do not apply to depos-its to share or share certificate accounts.

Section 4 – Regulation CC: Availability of Funds and Collections of Checks


SECTION 4 – REGULATION CC: AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS

Note: Some states have state funds availability rules that are broader in scope than Reg. CC.

Cash deposits

Credit unions must make funds deposited in an account by cash avail-able on the next day if the cash deposit is made at a staffed teller facility. Cash deposits made at unstaffed teller facili-ties must be available for withdrawal no later than the second business day after the banking day of deposit. For example, cash deposited in an account at a staffed teller facility on a Monday must be available for withdrawal by the start of business on Tuesday. However, cash deposited by mail, at a proprietary ATM, at a night depository, or at a lobby deposit box that is picked up and “avail-able for processing” on a Monday, must be available for withdrawal by the start of business on Wednesday. Cash depos-its are limited to U.S. coins and cur-rency.

Electronic payments

Deposits made by electronic payment must be made available for withdrawal not later than the business day after the banking day on which the credit union received the electronic payment. Electronic payments include both wire transfers and ACH credits. A credit union receives an electronic payment only when the credit union receives pay-ment both in actually and finally collect-ed funds and the payment instructions indicating the member’s account to be credited and the amount to be credited to each account.

• In the case of a Fedwire, the credit

union receives finally collected funds at the time the payment is made.

• In the case of an ACH credit transfer, finally collected funds are received when the transfer is posted to the receiving credit union’s account on the settlement day. However, the credit union must also receive the informa-tion on the account and the amount to be credited. Otherwise payments are not considered received until this information is obtained.

The Regulation’s next-day avail-ability requirements do not affect other Treasury or ACH association rules, regulations, or agreements that may require funds to be made available more promptly.

Government checks and certain other “low risk” checks

Credit unions must make funds from deposits of the following types of govern-ment and other “low risk” checks avail-able on a next-day basis:

• Treasury checks. Checks drawn on the U.S. Treasury and deposited in an account held by the payee of the check must be given next-day avail-ability, regardless of whether they are deposited at a staffed or unstaffed facility. Treasury checks deposited at a proprietary ATM must be accorded next-day availability, provided the check is deposited to an account of the payee. Special deposit slips may not be required for next-day availability of Treasury checks.

• U.S. Postal money orders. Next-day availability is required for deposits of U.S. Postal money orders deposited



at a staffed teller facility and into an account held by a payee of the money order. Credit union-issued money orders are considered teller checks and have to be given next-day availability. Also, other forms of money orders, such as American Express Money Orders, are treated as checks “payable through” the issuer of the money order and do not fall under the next-day availability requirement.

• Federal Reserve Bank and Federal Home Loan Bank checks. Next-day availability is required for checks drawn on a Federal Reserve Bank or a Federal Home Loan Bank and depos-ited at a staffed teller facility into an account held by the payee of the check. Next-day availability is required even if these checks are drawn on an institution outside the depositary cred-it union’s Federal Reserve District.

• State and local government checks. Checks drawn on a state or unit of local government and deposited in a credit union located in the state that issued the check, or in the same state as the unit of local government, must receive next-day availability if depos-ited at a staffed teller facility and into an account of the payee. Also, the depositary credit union may require that the check be deposited with a special deposit slip or deposit enve-lope.

• Cashier’s, certified, and teller’s checks. Deposits of cashier’s, certi-fied, or teller’s checks must be given next-day availability provided the check deposit is made at a staffed tell-er facility and into an account of the

payee of the check. A cashier’s check deposited at an ATM would not have to be given next-day availability. In addition, a credit union may condition next-day availability on use of a special deposit slip or deposit envelope with the deposit.

• “On us” checks. Deposits of “on us” checks must be given next-day avail-ability. “On us” checks are checks deposited to a branch of the depositary credit union and drawn on the same or another branch of the same credit union if both branches are located in the same state or check-processing region. For example, checks depos-ited in one branch of a credit union and drawn on another branch of the same credit union must receive next-day availability even if the branch the checks are drawn on is located in another check-processing region but in the same state as the branch in which the deposit was made. Deposits made at unstaffed facilities not located on the premises of the credit union, such as off-premises ATMs, are not consid-ered deposits made at branches of the depositary credit union. For example, an “on us” check deposited at a non-proprietary ATM or an “off premises” proprietary ATM would not require next-day availability.

• First $200. Up to $200 of the aggre-gate deposit of checks not subject to next business day or “next-day avail-ability” (for example, local checks) on any banking day must be made avail-able on the next business day. The $200 that must be available under this rule is in addition to the amount that must be made available on a next-



business day basis. However, the $200 next-day availability rule does not apply to deposits of local or nonlocal checks at nonproprietary ATMs. The following examples illustrate the first $200 rule:

If $90 were deposited in an account by other than “next-day checks” on Monday, the entire $90 must be avail-able for withdrawal at the start of busi-ness on Tuesday. If $500 were depos-ited by checks on Monday, $200 of the funds must be available for withdrawal at the start of business on Tuesday.

If a member deposits a $500 U.S. Treasury check, a $300 cashier’s check, and a $500 local check on Monday; $1,000 must be made avail-able for withdrawal on Tuesday — the full proceeds of the $500 U.S. Treasury check and the $300 cashier’s check as well as the first $200 of the local check.

For purposes of the $200 next-day availability rule, a depositary credit union may aggregate all local check deposits made by the member on a given banking day. Only $200 must be given next-day availability regardless of the number of accounts the checks are deposited into. The credit union may aggregate deposits to individual joint accounts for purposes of this rule.

Conditions for low-risk checks

Next-day availability for certain gov-ernment checks or “low risk” deposits may be conditioned upon any one or more of three statutory requirements: (1) the check must be payable to the accountholder; (2) the deposit must be made at a staffed teller station; and (3)

deposits must be made using a special deposit slip or envelope. Following is an explanation of each of these three statu-tory requirements and the deposits to which they relate:

1. Deposit in an account of the payee. For certain check deposits, funds must be available on a next-day basis only if the check is deposited in an account held by a payee of the check. A “payee” does not include transferees other than the original named payees. For example, a check that is endorsed in blank by the payee and deposited into an account of a third party not named as a payee would not meet this condition.

2. Deposit at a staffed teller station. Similar to cash deposits, next-day avail-ability for proceeds of certain check deposits is conditioned on the deposit being made in person to an employee of the depositary credit union (staffed teller facility). Check deposits made at unstaffed locations including a proprie-tary ATM, night depository, lobby deposit box, or through the mail, that otherwise meet any applicable deposit conditions, must be available for withdrawal on the second business day after deposit.

3. Special deposit slips. Credit unions have the option of requiring special deposit slips as a condition to providing next-day availability for certain low-risk checks. The use of special deposit slips is optional, not mandatory. These slips may be used by credit unions that wish to identify checks that cannot otherwise be identified as next-day items by their routing numbers. Credit unions may require special deposit slips for deposits of the following checks: state or local government checks, cashier’s, certified,



or teller’s checks. These checks bear the same routing number as other checks drawn on the same institution that are not accorded next-day availability.

Remember, provide next-day avail-ability for:

• Cash deposits;

• Electronic payments;

• First $200 of any check;

• Cashier’s, certified, and teller’s checks;

• U.S. Treasury checks;

• U.S. Postal Service money orders;

• Checks drawn on a Federal Reserve or Federal Home Loan Bank;

• State or local government checks.

Overview of check-availability schedule rules

General funds availability maximums:

• Local checks — by the second business day

• Nonproprietary ATMs — by the fifth business day

Checks, other than those that must receive next-day availability, are catego-rized as local.

Local checks

On February 27, 2010, the Federal Reserve Banks transferred the check-pro-cessing operations of the Federal Reserve Bank of Atlanta to the Federal Reserve Bank of Cleveland. This change com-pletes the FRB’s restructuring efforts, and all checks, regardless of their rout-ing numbers, are now considered local checks subject to local hold periods.

General Rule. Local checks must be made available for withdrawal under the perma-nent schedule by the second business day after deposit. In addition, the following items are treated as local items:

• Proceeds from Treasury and U.S. Postal Service money orders that are not deposited to the account of the payee.

• Treasury checks deposited in shared ATMs.

• Federal Reserve, Federal Home Loan Bank (FHLB), state and local govern-ment checks, and cashier’s, teller’s, and certified checks that do not qualify for next-day availability but are payable in the same check-processing region as the depositary institution.

The $200 next-day availability rule applies to local checks but additional cash withdrawals may be delayed by one business day. The depositary credit union must make $400 of a deposit available for withdrawal by cash or simi-lar means (electronic payment, cashier’s check, etc.) not later than 5 p.m. on the business day the funds would oth-erwise be available. The availability of the remainder of the deposit can be delayed as a cash withdrawal until the morning of the following business day. For example, if a member deposits an $800 local check on Monday, $200 must be available on Tuesday, and $400 must be available in cash by 5 p.m. on Wednesday. The remainder of the depos-it would be available to write checks on Wednesday and available for cash with-drawal on Thursday morning.

Payable-through banks. If a check is payable by a credit union that is located in



the same check-processing region as the depositary institution but is payable through a bank located in another check-processing region, the check is considered local. However, a check payable through a local bank but payable by a nonlocal credit union is a nonlocal check. Where two institutions are named on a check and neither is desig-nated as a payable-through bank, the check is considered payable by either institution and may be considered local or nonlocal depending on which institution it is sent to for payment.

As a result of a Federal District Court order invalidating the Federal Reserve Board’s Regulation CC definition of the term “paying bank,” the FRB adopted an interim amendment redefining sever-al terms so that a paying bank includes a payable-through bank where the check is drawn on a credit union. Credit Union National Association v. Board of Governors, No. 88-1295 OG (D.D.C. July 28, 1988).

For deposits at nonproprietary ATMs, all check deposits are considered nonlo-cal checks (for example, fifth-day avail-ability) for purposes of the availability of the funds deposited.

Cash Withdrawal Requirements. While the general rule that funds from the deposit of a local check must be available for with-drawal on the second business day follow-ing the day of deposit, the entire amount of these funds need not be available by cash withdrawal. Regulation CC includes a spe-cial cash withdrawal rule to provide deposi-tary credit unions with additional time to learn of the nonpayment of a check before making funds available to members.

A depositary credit union must make $400 of these funds available for with-drawal by cash or similar means not later

than 5 p.m. on the second business day following the banking day on which the funds are deposited. This $400 is in addition to the first $200 of a day’s deposits which must be available on the next business day. The remainder of the funds must be available for cash with-drawal at the start of business on the third business day following the banking day on which the funds were deposited.

The cash withdrawal rule applies not only to cash withdrawals but also to electronic payments and point-of-sale debits. Also, for purposes of withdrawals at ATMs, the $400 cash amount may be reduced to the extent a credit union’s daily ATM cash withdrawal limit is lower. For example, if the credit union limits cash withdrawals at ATMs to $200 per day, the credit union need only make $200 available through an ATM in cash by 5 p.m. on the third business day.

Deposits at ATMs

The Act and Regulation CC recognize that credit unions may not be able to distinguish between cash and certain kinds of check deposits made at nonpro-prietary ATMs quickly enough to meet the availability schedules. Thus, longer hold periods may be placed on funds deposited at nonproprietary ATMs.

• Nonproprietary (shared) ATMs. All deposits at nonproprietary ATMs (including cash deposits, checks that would otherwise be subject to next-day availability) and local checks must be available for withdrawal on the fifth business day following the banking day of deposit. The $200 next-day avail-ability rule does not apply to deposits at shared ATMs. A deposit received



at a shared ATM on Monday must be available for withdrawal not later than Monday of the following week.

• Proprietary ATMs. Deposits at pro-prietary ATMs are generally treated as deposits at the credit union’s offices. Local checks must be available within their general time periods — on the second business day. However, most next-day availability items deposited at proprietary ATMs are not subject to next-day availability. Treasury checks and U.S. Postal Service money orders not subject to next- or second-day availability, Federal Reserve or FHLB checks, state and local government checks, and cashier’s, teller’s, and certified checks not subject to next- or second-day availability, must be avail-able on the second business day after the day of deposit.

One-day extension

The Act and the Regulation provide a one-business-day extension to the per-manent availability schedules for local and ATM deposits made at a branch of a domestic institution, if the branch is located in Alaska, Hawaii, Puerto Rico, or the U.S. Virgin Islands and if the deposit is drawn on or payable through an institution not located in the same jurisdiction as the depositary institu-tion. The one-day extension does not apply to next-day availability items or items drawn on an institution located in Alaska, Hawaii, etc., that are deposited in an institution located in one of the 48 contiguous states.

For example, a check deposited in a credit union in Hawaii and drawn on a San Francisco-paying credit union

must be available for withdrawal not later than the third business day follow-ing deposit. But a check deposited in a San Francisco credit union drawn on a Hawaii-paying credit union must be available for withdrawal not later than the second, rather than the third, busi-ness day following deposit.

Exceptions to availability schedules

Some checks may not be returned to the depositary credit union by the time funds are required to be available for withdrawal. In order to reduce the risk this presents, the FRB adopted excep-tions to the availability schedules to allow depositary institutions to extend the time credit unions are required to make funds available. Credit unions may extend the time when funds must be made available for deposits in the “safe-guard” circumstances highlighted in the discussion below.

In addition to these five excep-tions, a credit union may protect itself with respect to deposits made to new accounts. These exceptions apply to the schedules for local checks and ATM deposits. The exceptions generally do not apply to checks or other deposits that must be given next-day availabil-ity, except in limited cases under the Reasonable Cause Exception discussed in Safeguard Exceptions below.

When one of these safeguard excep-tions is invoked, the credit union is required to mail or provide in person a notice identifying the reason for the exception hold.

A credit union invoking one of the exceptions (except the emergency



exceptions) may extend the local (sec-ond business day) schedule by a reason-able period of time. Under Regulation CC, an extension of five business days for local checks and all next day items except for on-us checks is considered to be a reasonable period. A reason-able period of time for “on-us” checks is an extension of one business day for a total hold time of two business days. A reasonable period of time for checks deposited in a nonproprietary ATM is an extension of six business days for a total hold time of eleven business days.

When the emergency exception is invoked, a “reasonable time” is defined as either a reasonable time after the emergency has ended or the period established in the permanent schedule whichever is later.

The five safeguard exceptions are:

1. Large deposits. A depositary credit union may extend the holds placed on a member’s local check deposits when the total deposit exceeds $5,000 on any one banking day. The first $5,000 of a day’s deposit is subject to the local schedules and the amount in excess of $5,000 may be held for an additional (reasonable) period of time. Deposits of cash and electronic payments are not subject to the excep-tion but remain subject to next-day availability, regardless of the amount of the deposit. However, the first $200 of checks made available on a next-day basis may be taken into account in deter-mining the deposit amount subject to the additional hold. For example, if a member deposits $9,000 in cash and an $8,000 local check on a Monday, $9,200 (the cash and the first $200 of the local check)

must be made available for withdrawal on Tuesday. An additional $4,800 of the proceeds of the local check must be available for withdrawal in accordance with the local schedule, and the remain-ing $3,000 may be held for an additional period of time under the large-dollar exception. If a member has multiple accounts at a depositary credit union, the credit union may apply the large-dollar excep-tion to the aggregate deposits to all of the member’s accounts regardless of how the deposits are allocated among the member’s accounts, and regardless of other joint accountholders. The excep-tion would apply to deposits of $5,000 or more made to two individual accounts of the member, to an individual account and a joint account of the member, or to the joint accounts of the member. For example, if a member deposits two $4,000 local checks to an individual account and a $3,000 local check to a joint account on Monday, an aggregate of $200 from the accounts must be available for withdrawal on Tuesday. An additional $4,800 of the proceeds must be available for withdrawal in accordance with the local schedule, and the remain-ing $6,000 may be held for an additional period of time under the large-dollar exception.

2. Redeposited checks. A depositary credit union can extend the local check hold schedule for an additional period for any check that has been returned unpaid and redeposited by the member or the depositary credit union. This exception applies to local checks as well as to checks that would otherwise be made available on the next (or second) busi-ness day after the day of deposit under

FIVE SAFEGUARD EXCEPTIONS

1. Large deposits (checks totaling $5,000 or more deposited on any one day).

2. Redeposited checks.3. Repeated overdrafts.4. Reasonable cause to

doubt collectibility.5. Emergency conditions.



Section 229.10(c). Even though a depositary credit union may invoke an exception hold on a redeposited check, the next-day avail-ability requirement for the first $200 of check deposits may apply to the check upon redeposit. For example, a deposi-tary credit union that receives a check returned unpaid, for which $200 of the check was initially made available on a next-day basis, can charge back the full amount of the check, including the $200, but $200 need not be made avail-able again if the check is redeposited. Of course, credit unions may always refuse to accept a deposit or may accept a deposit for collection only. To determine when funds must be made available for withdrawal, the banking day on which the check is redeposited is considered to be the day of deposit.

3. Repeated overdrafts. If any account or combination of accounts of a member is repeatedly overdrawn, a depositary credit union can extend the local hold schedules for checks deposited to any accounts of the member during the six-month period following the most recent overdraft. Even though a member may have repeatedly overdrawn accounts, this exception may not be applied to any cash deposits and electronic payments under 229.10(a) & (b). This exception applies to local checks as well as to checks that otherwise would be made available on the next (or second) business day after the day of deposit. When a credit union extends a hold under this exception, it need not make the first $200 of a deposit available for withdrawal on the next business day as otherwise would be required by Section 229.10(c)(1)(vii). This exception relates not only to

overdrafts caused by checks but to any other debit charges, such as ACH deb-its, point-of-sale transactions, returned checks, and account fees. Regulation CC provides two tests to determine what constitutes repeated overdrafts:

1. If a member’s account (or any com-bination of the member’s accounts) has had a negative balance, or would have had a negative balance if checks had been paid rather than returned, on six or more bank-ing days within the preceding six months, the account is considered a repeatedly overdrawn account. This test can be met based on one occurrence (for example, a member’s account that remains overdrawn for six banking days) or separate occurrences (for example, checks returned for insufficient funds on six different days). If the credit union dishonors a check that otherwise would have created a negative balance, the incident is considered an overdraft only on that day.

2. If a member’s account has had a negative balance or might have had a negative balance in an amount of $5,000 or more on two or more banking days, the account is con-sidered a repeatedly overdrawn account.

4. Reasonable cause to doubt collect-ibility. If a credit union has reasonable cause to believe that a check is uncol-lectible, it may extend the time funds must be available for withdrawal. This exception applies to local checks, as well as to checks that would otherwise be



made available on the next (or second) business day after the day of deposit under Section 229.10(c). Treasury checks, U.S. Postal money orders, state and local government checks as well as certain “low-risk” items includ-ing Federal Reserve or FHLB checks, cashier’s, certified, or teller’s checks. When a credit union extends a hold under this exception, it need not make the first $200 of a deposit available for withdrawal on the next business day as otherwise would be required by Section 229.10(c)(1)(vii). Reasonable cause to believe a check is uncollectible requires the existence of facts that would cause a well-founded belief in the mind of a reasonable per-son. If a credit union invokes this excep-tion for a particular deposit, the member must be notified and the reasons for the hold must be given. There are numer-ous circumstances that might cause a credit union to doubt the collectibility of a check deposit. For example, receipt of a notice that an item is being returned unpaid, receipt of a stop-payment order, receipt of information that a drawer’s account has insufficient funds to cover a check, presentment of a check that is stale or postdated, check alterations, or obscured indorsements. A sample of Loanliner® Deposit Hold Notice, used in providing the required reasonable cause exception notice is included as Appendix 4-A to this section.

Note: There are reasons that may cause a credit union to believe that a check is uncollectible based on confi-dential information. For example, if a credit union suspects a check deposit is part of kiting activity, if the credit union is aware of the insolvency or

pending insolvency of the drawer of the check or of the drawee institu-tion, or if the check is drawn on the account with repeated overdrafts, such circumstances would justify invoking this exception. In these cases, the credit union may simply indicate, as the reason it is invoking the exception, that the credit union has confidential information.

• Reasonable-cause exception notice. If this exception is invoked, the credit union must notify the member of the delay in funds. However, for this exception the rea-son the credit union believes the check is uncollectible must also be stated. A depositary credit union must retain a record of each notice of a reasonable-cause exception, as well as a brief statement of the facts causing the credit union’s reason to doubt the collectibility of the check, including confidential information.

• Overdraft fees. If a depositary credit union invokes this exception with respect to a particular check deposit and does not provide written notice to the depositor at the time of deposit, the credit union may not charge the member any overdraft fee or NSF fee, or charge interest for use of over draft credit, provided the check is paid by the paying credit union and these charges would not have occurred had the exception not been invoked. In order to charge an overdraft fee under these circumstances, the credit union must provide the Notice of Exception Hold or Reasonable Cause Notice and must



include a provision that the member may be entitled to a refund of any overdraft fees as well as indicate where to direct a refund request.

5. Emergency conditions. Certain emer-gency conditions may cause unavoidable delays in the collection, processing, or return of checks. In emergency situa-tions, the depositary credit union may extend the holds that are placed on local checks affected by those delays but must exercise such diligence as the circumstances require. This exception applies to local checks as well as checks that would otherwise be made available on the next (or second) business day after the day of deposit under Section 229.10(c). When a credit union extends a hold under this exception, it need not make the first $200 of a deposit avail-able for withdrawal on the next business day, as otherwise would be required by Section 229.10(c)(1)(vii). Emergencies would include circumstances such as:

• an interruption of communications, computer, or other equipment facili-ties;

• a suspension of payments by anoth-er institution;

• a war;

• an emergency condition beyond the control of the depositary credit union.

If a credit union invokes this excep-tion, funds from the deposit must be available for withdrawal not later than a reasonable period after the emergen-cy has ended or the period established for a local check — whichever is later. For example, if a credit union learns that a local check has been delayed in

the process of collection due to severe weather conditions or other causes beyond its control, the credit union may place a hold on the check due to the emergency, if the credit union has acted in good faith and has exercised diligence under the circumstances. Funds must be available for withdrawal within the local check schedule or a reasonable period after the emergency ends — whichever is later.

6. New accounts exception. In addition to the safeguard exceptions described earlier, Regulation CC provides an excep-tion to the availability schedules for deposits made to a new account. An account is defined as a new account during the first 30 calendar days after it has been opened with an initial (for example, an established account) deposit. However, if a member has an existing transaction account with the credit union, an additional account opened by the member would not be a new account subject to the excep-tion. Similarly, an additional account opened by a member would not be a new account if the member has an estab-lished joint account and then opens an individual account. A new account would be established if the member has an existing savings deposit, rather than a transaction account, and opens a check-ing account; or one of two members opening a joint account does not have a current or recently established account, even if the other individual has an estab-lished account. The depositary credit union may rely on the representations of the member that no established transac-tion account relationship with the credit union exists, and has not existed within the past 30 days, to determine whether



an account is subject to the new account exception. When this exception is invoked, the schedule for local checks does not apply, and the time frames within which proceeds of local check deposits must be available are left to the discretion of the depositary institution. The availability rules for “low-risk” items deposited to a new account vary in the following ways:

• Cash and electronic payments must be available by the next business day.

• Treasury checks, U.S. Postal money orders, Federal Reserve and FHLB checks, state and local government checks, cashier’s, certified, teller’s checks, traveler’s checks (for the new account exception only), and the first $5,000 deposited on any one banking day must be available on the next business day (provided the next-business-day availabil-ity conditions are met). Funds in excess of $5,000 must be available by the ninth business day.

• For “on us” checks and the first $200 of checks, there are no maxi-mum availability periods.

There is no notice requirement for placing holds on funds due to the new account exception at any time during the 30-day new-account period. However, an initial disclosure statement must be given at the time the new account is opened.

General rules

Throughout Regulation CC, the day the deposit is made is the starting point

for determining when funds must be made available for withdrawal. The day funds are deposited varies depending on the circumstances of the deposit:

• Funds received at a staffed teller sta-tion are considered deposited when received by the teller.

• Funds mailed to the depositary credit union are considered deposited on the banking day they are received (for example, when the mail is delivered to the credit union, even if only to the mail room).

• Funds received at a night deposi-tory are considered deposited on the banking day the deposit is removed, and the contents of the deposit are accessible for processing (for exam-ple, funds deposited in a locked bag would be accessible when the bag is unlocked).

• Funds received at an ATM are consid-ered deposited when the funds are placed in the ATM.

• Funds received at an off-premises ATM that is not serviced frequently (not more than two times each week) are considered deposited on the day they are removed from the ATM. Credit unions accepting funds for deposit at such an ATM must post a notice at the ATM informing depositors that funds deposited may not be considered received on the day of deposit.

A deposit received on a day that the depositary credit union is closed, or after the credit union’s cutoff hour, may be considered made on the next bank-ing day. For purposes of the availability schedules, a credit union may estab-lish a cutoff hour of 2 p.m. or later for



receipt of deposits in any branch office, and a cutoff hour of noon or later for deposits at ATMs, contractual branches, or off-premises facilities. Also, a credit union may establish different cutoff hours for different types of deposits or for deposits received at different loca-tions so long as the minimum cutoff hours are followed.

Deposits available at the start of a business day

If funds must be available for with-drawal on a business day, they must be available for withdrawal by 9 a.m. or the time the depositary credit union’s teller facilities, including ATMs, are avail-able for member account withdrawals, whichever is later. For example, if a credit union has no ATMs and its teller stations open at 10 a.m., funds must be available for withdrawal beginning at 10 a.m. If a credit union has ATMs that are available 24 hours a day, then funds must be avail-able for withdrawal by 9 a.m.

Holds on other funds

A depositary credit union may reserve the right to place a hold on funds in the same amount already on deposit in any account of the member when the credit union allows the member to either cash a check or immediately withdraw funds from the check deposit. Funds from the account subject to the hold must be made available within the time period the funds from the check cashed or deposited would have been available under the Regulation CC availability schedules.

Payment of interest/dividends

The Act and the Regulation require that a depositary credit union begin to accrue dividends/interest on funds deposited in a dividend or interest-bear-ing transaction account not later than the business day on which credit for the funds is received. For the purposes of determining dividends or interest accrued on deposits, a credit union may rely on an availability schedule from its Federal Reserve Bank or Federal Home Loan Bank to determine when they actually receive credit. Alternatively, a depositary credit union may accrue divi-dends or interest on checks deposited to all of its dividend/interest-bearing accounts based on when the credit union receives credit on all checks sent for payment or collection.

Regulation CC does not prohibit requiring a minimum balance before dividends or interest accrue on an account provided the required balance is determined based on the date the credit union receives credit for the funds. Also, the Regulation does not require credit unions to pay dividends or interest on funds deposited by a check returned unpaid for any reason.

Disclosure and Notice Requirements

The Act and the Regulation mandate the disclosure of a credit union’s funds availability policies and set forth vari-ous requirements to ensure that credit unions inform their members throughout the deposit relationship about the spe-cific funds-availability policy.



Disclosure standards

The disclosure standards are gener-ally similar to the initial and subsequent disclosure standards under the FRB’s Regulation Z.

“Clear and conspicuous”

All of the required disclosures and notices must be given in a “clear and conspicuous” manner and be in writing. The FRB has issued model forms, claus-es, and notices to facilitate compliance with the disclosure and notice require-ments. Although use of the model forms, clauses, and notices is not required, credit unions using them properly will be deemed to be in compliance with the disclosure requirements of Regulation CC. The FRB’s Model Forms, Clauses, and Notices can be found in Appendix C to Regulation CC.

Retention of disclosures

In most cases, the written disclosure must be in a form the member may retain. This retention standard applies to the initial disclosures given to mem-bers and to any member upon request, as well as the notices of a change in policy, case-by-case holds, and excep-tion holds. Disclosures required to be posted at branches and at ATMs and the disclosures printed on deposit slips or envelopes need not be in a form the member may keep.

The required initial disclosures and notices may be provided in electronic form as long as the disclosure or notice is displayed as text and can be down-loaded or printed. Thus, initial required

disclosures can be delivered via fax or on a credit union website.

“Grouped together”

The funds-availability disclosures must be “grouped together and must not contain any information not directly related” to the required disclosures. This means credit unions may not combine the various required availability disclo-sures with other account disclosures or include account information unrelated to their funds-availability policy within the required disclosures. For example, general information on making deposits at ATMs would not be related to funds availability and may not be added to the required disclosures.

However, the regulation does not require the funds availability disclosures to be segregated from other account terms and conditions so credit unions may incorporate their funds-availability disclosure requirements in deposit account agreements and disclosures. However, if the funds availability disclo-sures are included in a document con-taining other account terms, the funds availability disclosures must be sepa-rately grouped together and identified by a separate heading.

Uniform reference for counting business days

In order to enable members to com-pare funds availability policies of dif-ferent credit unions, Regulation CC requires credit unions to disclose their availability policies by using a uniform reference to the business day on which funds are available for withdrawal. The reference must describe funds as being

https://www.ecfr.gov/cgi-bin/text-idx?SID=36183a3363d95f7bafe5f09d61327277&mc=true&node=ap12.3.229_160.c&rgn=div9

https://www.ecfr.gov/cgi-bin/text-idx?SID=36183a3363d95f7bafe5f09d61327277&mc=true&node=ap12.3.229_160.c&rgn=div9



available “on the _____ business day after” the day of deposit.

Multiple accounts

Credit unions need only provide one disclosure to a member holding multiple accounts, or to one accountholder of a jointly held account. Multiple disclo-sures are not required.

Initial disclosuresNew accounts

Credit unions must provide all the initial disclosures before opening an account. Under this requirement, disclo-sures must be provided prior to accept-ing a deposit to open an account. The credit union should provide the required disclosures along with, or within, an account agreement at the time a mem-ber establishes the account. If a written request to open an account is received by mail along with an initial deposit, the credit union may open the account, as long as the initial disclosure is mailed to the member no later than the busi-ness day following the banking day the deposit is received.

Specific availability policy disclosure

A credit union must provide a dis-closure describing the specific policy regarding the availability of deposited funds. This disclosure must reflect the policy followed by the credit union in most cases, even though, in some cases, funds may be available sooner or a lon-ger delay may be imposed.

Contents of the credit unions funds-availability policy

The initial funds-availability policy disclosure shall contain the following information, as applicable:

• A summary of the credit union’s gen-eral availability policy (holds up to the statutory limits, second day for local checks or case-by-case holds).

• For statutory hold policies, a descrip-tion of any categories of deposits used by the credit union when it delays availability (such as local checks), and a description of how to determine the category to which a particular deposit or check belongs (such as routing numbers of local checks).

• For case-by-case hold policies, a description of the hold policy that might result in later availability than under the general policy.

• A statement of when each deposit cat-egory will be available for withdrawal (stated in terms of the credit union’s business days).

• A statement of when a deposit is con-sidered received. The credit union would describe its deposit cutoff time for determining when deposits are considered received on the next day. If the individual branches have dif-ferent business-day cutoff times, the credit union would only be required to disclose that some locations have different cutoff times and the earliest cutoff time; it would not be required to disclose the specific cutoff time for each location. However, if the credit union does not have a deposit cutoff hour prior to its closing time, the credit



union need not disclose a cutoff hour.

• A description of any of the statu-tory exceptions (safeguard and new accounts) the credit union reserves the right to invoke, along with (1) the time following deposit when funds would generally be available if an exception is invoked and (2) a statement that the credit union will notify the member if one of the exceptions is invoked.

• A description of how the member may differentiate between a shared and proprietary ATM, if the credit union makes deposits from a shared ATM available for withdrawal later than the periods in the general availability policy.

A sample LOANLINER® Funds Availability Policy, is included as Appendix 4-B of this section.

Special rules for case-by-case hold policies

If a credit union has a general policy of making deposited funds available for withdrawal sooner than required under the regulation (for example, same or next day), the credit union may still impose holds on funds up to the regulatory time limits on a case-by-case basis but addi-tional information on the specific disclo-sure policy must be included. While a credit union with a next-day availability and case-by-case hold policy will gener-ally have a more simplified specific pol-icy disclosure, the following disclosures must also be given:

• A statement that the time when depos-ited funds are available will be extend-ed in some cases and specification of the latest time funds will be available.

• A statement that the credit union will notify the member if funds will be held beyond the time stated in the availabil-ity policy.

• A statement that members should inquire about the availability of a par-ticular deposit.

Regulation CC requires the credit union to provide its members with a notice each time a hold is placed on a deposit. The requirements for the “case-by-case” notice are discussed later.

Subsequent disclosures

The Regulation requires credit unions to give certain subsequent disclosures. In addition to providing the initial funds availability disclosures, a credit union must provide specific disclosures on two other occasions: 1) upon a member’s request; and 2) upon any change in the credit union’s funds-availability policy.

Disclosure upon request

A credit union must provide its spe-cific availability policy disclosure upon oral or written request. There is no required time period within which the specific disclosure must be provided but it should be sent within a reasonable period of time following the receipt of the request. Also, this requirement is not limited to existing members but requires the credit union to give initial disclo-sures to any person upon request.

Changes in terms

A credit union must send a notice to its members when it changes its funds availability policies. This notice must be sent at least 30 calendar days before



implementing any change in terms of the availability policy. However, if the change results in faster availability of deposits, the credit union need not send advance notice but must send the notice of changed terms within 30 days after the change is implemented.

The credit union may provide a notice describing the specific changed policy, or send members a complete new initial disclosure along with a letter or insert or highlight the changed terms in the dis-closure.

Notice of case-by-case holds

Credit unions that make deposited funds available for withdrawal sooner than required under the regulation (for example, providing same- or next-day availability or at least sooner than the availabil ity schedules) but also delay or extend the time when deposited funds are available for withdrawal on a case-by-case basis, must provide an addi-tional notice.

Contents

The notice of a case-by-case hold must include the following information:

• Member account number.

• Date of deposit.

• Amount of deposit being delayed.

• Date funds will be available for with-drawal.

The notice does not require a state-ment of the specific reason for the hold. For a deposit involving more than one check, the credit union need not provide a notice that discloses when funds from

each individual item in the deposit will be available for withdrawal. Instead, the credit union may provide a total dol-lar amount for each of the time periods when funds will be available.

Timing

This notice must be provided at the time of the deposit and must be given to the person making the deposit. If the deposit is not made in person to an employee of the depositary credit union (for example, ATM, lobby, night deposit box, or by mail), or the decision to extend the time when the deposited funds will be available is made after the time of deposit, the credit union must mail or deliver the notice to the member not later than the next business day after the day of deposit.

Safeguard exception hold notice

Many checks will not be returned to the depositary credit union before the credit union is required to make the funds available under the local schedule. In order to reduce the risk for credit unions, the FRB adopted certain “safeguard exceptions” to the sched-ules allowing the credit union to extend the time within which it is required to make funds available. These exceptions include deposits:

• In excess of $5,000 on any day and checks returned unpaid and redeposited.

• To accounts that have been repeatedly overdrawn within the last six months.

• Of checks for which the credit union has reasonable cause to doubt collect-ibility.



• Of checks made during emergency conditions.

If a credit union invokes any of these safeguard exceptions except for emergencies and extends the hold on a deposit beyond the time of regulatory limits, the credit union must provide a notice to its member.

Content of the notice

The notice of exception must include the following information:

• The account number of the member.

• The date of the deposit.

• The amount of the deposit that is being delayed.

• The reason the exception was invoked

The credit union may simply state the particular exception that is being invoked in order to satisfy giving the reason for the exception, unless the exception is the reasonable-cause exception, which may require a more specific reason. If a hold is being placed on more than one check in a deposit, each check need not be described, but if different reasons apply, each reason must be indicated.

Reasonable cause exception notice

If the reasonable cause exception is invoked, the reason the credit union believes the check is uncollectible must be disclosed. A simple statement that the credit union believes a check is uncollectible is not enough. The fol-lowing circumstances would provide a sufficient basis to invoke this exception: notice of nonpayment of an item, stop payment of an item, insufficient funds notice, return of an item, or the stale

date or postdate of a check. If a deposi-tary credit union invokes this exception and does not provide the written notice to the depositor at the time of deposit, the depositary credit union may not assess any overdraft fee, the check is paid by the paying credit union and these charges would not have occurred had the exception not been invoked. The credit union may assess an overdraft fee under these circumstances, however, if it alerts the member in the notice of exception that the fee may be subject to refund, and that the credit union will refund the charges upon the request of the member.

There are reasons that may cause a credit union to believe that a check is uncollectible which are based on con-fidential information. For example, the credit union could conclude that a check being deposited is uncollectible based on its reasonable belief that the deposi-tor is engaged in kiting activity or may be insolvent. In these cases, the credit union may indicate, as the reason it is invoking the exception, that it has confi-dential information which indicates that the check might not be paid. A credit union can invoke a reasonable-cause exception based on a combination of factors and should disclose the primary reason in such instance.

Timing

For deposits made in person to an employee of a credit union, the notice generally must be given at the time of the deposit. The depositor need not be the member holding the account. If the credit union later learns of facts requir-ing an exception hold, the notice must be mailed to the member as soon as practicable, but not later than the busi-



ness day following the day the facts become known.

For other deposits, such as deposits received at an ATM, lobby deposit box, night depository, or through the mail, notice must be mailed to the member not later than the close of the business day following the banking day on which the deposit was made.

Record retention period

A depositary credit union must retain a record of each notice of a reasonable cause exception, and the records sup-porting exceptions based on confidential information, for two years. This record must contain a brief description of the facts upon which the depositary credit union based its judgment. In some cases, such as when the exception is based on a notice of nonpayment, this record requirement may be satisfied by retaining a copy of the notice sent to the member.

Notice on deposit slips

All credit unions must include a notice on all preprinted deposit slips furnished to members that deposits may not be available for immediate with-drawal. The deposit slip notice need only state, somewhere on the front of the deposit slip, that deposits may not be available for immediate withdrawal. The FRB has provided Model Notice (C-21)which satisfies the deposit slip notice requirement.

Preprinted deposit slips

The notice is required only on deposit slips that are preprinted with the member’s account number and name,

and furnished by the credit union in response to a member’s order. A credit union need not include the notice on the deposit slips that are not preprinted and supplied to the member, such as coun-ter deposit slips or ATM deposit enve-lopes. If a member uses a deposit slip not obtained from or through the credit union, the credit union is not responsi-ble for ensuring that the notice appears on those deposit slips.

Notice at locations where credit union employees accept deposits

Credit unions must post a notice regarding funds availability in a conspic-uous place at each location where credit union employees receive deposits. The notice need not be posted at each teller window but must be posted in a place where members seeking to make depos-its are likely to see it before making their deposits (for example, signs located at a point where lines form for teller services or member service counters). The notice is not required at drive-through teller windows, at night depositories, at loca-tions where deposits are not accepted, or at contractual branches. The FRB has provided Model Form C-17 and C-18 for this notice covering specific and case-by-case policies.

Notice at ATMs

Credit unions must either post or pro-vide a notice regarding funds availability at all ATMs where deposits can be made to accounts in the depositary credit union stating that the funds deposited may not be available for immediate with-

https://www.gpo.gov/fdsys/pkg/CFR-2012-title12-vol3/pdf/CFR-2012-title12-vol3-part229-appC.pdf





drawal. This notice may be given in a number of ways: 1) posted on a sign at the ATM: 2) shown on the ATM screen; or 3) included on deposit envelopes pro-vided at an ATM. The disclosure must be given before the member has made the deposit. A notice provided on an ATM receipt or appearing on the ATM screen after the deposit has been made would not satisfy this requirement.

Credit unions that operate off-premises ATMs from which deposits are removed not more than two times a week must disclose this fact on the off-premises ATM. The notice must identify the days on which deposits made at the ATM will be considered received. The FRB has provided a Model For C-9 for complying with this notice requirement.

The Collection and Return Process

Overview of the forward collection and return system

Before reviewing the check-return requirements under Regulation CC, a general understanding of the current process for the collection and return of checks, and the responsibilities of pay-ing, returning, and depositary institu-tions, is helpful.

Forward collection system

The forward collection system begins with the deposit of a check or item into the payee’s or endorsee’s account at the “depositary credit union.” This credit union endorses the check and encodes it with the dollar amount. The deposi-tary credit union totals all items, except

“on-us” items, prepares a cash letter of the items for delivery to the Federal Reserve Bank (“Federal Reserve”) or correspondent credit union, and delivers the cash letter and items to the Federal Reserve or correspondent by courier. A depositary credit union’s on-us items are handled through local check-clearing arrangements, clearing houses, or direct exchange arrangements where two or more institutions agree to exchange checks drawn on each other.

Correspondent institutions may route forward collection checks for payment either through the Federal Reserve or through private, “intermediary finan-cial institutions.” Items delivered to the Federal Reserve or correspondent institution are endorsed and encoded if necessary and then processed on high-speed readers/sorters that capture MICR-like information, film, endorse, assign a sequence number, and sort by endpoint for their next destinations for collection. Items with the same endpoint are bundled along with a cash letter and dispatched by courier to the paying insti-tution or another Federal Reserve Bank or intermediary institution. This process is repeated at each intermediary institu-tion until the items are delivered to the paying credit union or the paying credit union’s item processor.

Typically, “paying credit unions” (or the paying credit unions’ item processors) receive checks for payment throughout the day from correspondent institutions, the Federal Reserve Bank, or through a clearinghouse. The checks are run through a high-speed reader/sorter that captures MICR-like information, films, endorses, and assigns a sequence num-ber. The checks are then posted to mem-




bers’ accounts and checks that are not paid (due to insufficient funds, stop pay-ments, accounts closed, etc.) are rejected and listed on an exception report.

Return check system

The actual decision by the “paying credit union” to return a check may be made automatically or upon manage-ment’s review of the exception report. Checks to be returned are stamped with a return stamp, filmed, sorted, and bundled and a return-cash letter is prepared. The return items and return-item cash letter are then dispatched by courier with the credit union’s forward collection checks, by mail or courier to other collecting institutions, or by mes-senger to the clearinghouse.

Under the UCC and the Federal Reserve Bank’s Regulation J, the paying credit union must dispatch a check it has determined not to pay by midnight of the banking day following the day the pay-ing credit union received the check (the “midnight deadline”). This obligation is satisfied by dispatching the returned check by one of the means mentioned above. For returned checks of $2,500 or more that were presented by the Federal Reserve Bank, the paying credit union is required to give a notice of return to the depositary institution by midnight of the third banking day following receipt.

Generally, the return of checks follows the endorsement chain. A “returning credit union” receives a returned check from the institution to which it sent the check for collection or payment and the returning credit union then sends the returned check to its prior endorser. In sending the returns to its prior endorser, returning credit unions are under a duty

to dispatch returned checks by midnight of the banking day following the day the returning credit union received the check. Payment for the returned check is typically a reversal of the payment made during the forward collection process.

The “depositary credit union” receives returned checks from both pay-ing and returning institutions. Generally, a returned check is received from the institution used by the depositary credit union for forward collection. Depositary credit unions also receive notices of non-payment on checks of $2,500 or more collected through the Federal Reserve.

Collection of checks

Subpart C of the Regulation estab-lished a number of provisions designed to improve the collection and return-check process. The principal rule is a requirement that both paying and return-ing institutions handle returned checks with the same speed and diligence (“expeditious manner”) as an institution would use for handling a similar forward collection item. Additional rules for the expeditious return requirement include: the authorization of direct returns, the notification of nonpayment of large-dol-lar returns by the paying institution, new deposit deadlines, rules for accepting returned checks, uniform check indorse-ment standards, and other related changes to the check collection system.

Expeditious return of check— paying and returning credit union’s responsibilities

Generally, a check is returned expedi-tiously if returned in a manner at least as fast as the credit union would dispatch a



check in the forward collection process. Regulation CC sets forth two standards for meeting this expeditious return responsibility, a “two-day/four-day” test, and a “forward collection” test.

Two-day test

A “paying credit union” must return a check so that it would normally be received by the depositary bank by certain specified times depending on whether the paying credit union is locat-ed in the same check processing region as the depositary institution.

• If the paying credit union is located in the same check processing region as the depositary institution, a check is returned expeditiously if returned to the depositary institution by 4 p.m. (local time of the depositary institu-tion) on the second business day after the banking day on which the check was presented to the paying credit union. For example, a local check presented to a Seattle, Wash., pay-ing credit union on Monday must be returned to a Portland, Ore., depositary institution by 4 p.m. on Wednesday.

Note: This test does not necessar-ily require actual receipt of the check by the depositary institution by 4 p.m. on the second day. Rather, the paying credit union must send the check so that the check would normally be received by the depositary institution by those times. The paying credit union is not responsible for unforeseeable delays in the return of the check such as trans-portation delays or mishandling by a returning institution. The times speci-fied in this two day test is based on esti-mated forward collection times but take

into account the difficulties that may be encountered in handling returned checks.

Under this test no particular means of returning checks is required provid-ing flexibility to paying credit unions in selecting the means of return. Typically, the paying credit union will use return-ing institutions as their agents to return checks to depositary institutions. A pay-ing credit union may rely on the avail-ability schedule of the returning institu-tion it uses in determining whether the returned check would “normally” be returned to the depositary institution by 4 p.m. on the second day, unless the paying credit union has reason to believe these schedules do not reflect the actual time for return of a check.

A paying credit union is authorized to route a returned check in a variety of ways:

• Direct delivery to the depositary insti-tution by courier or other means, by passing returning checks.

• Sending the item to a returning institu-tion agreeing to handle the returned check for expeditious return regardless of whether or not the returning institu-tion handled the check for forward col-lection.

• Sending the item to the Federal Reserve Bank which must accept returned checks from all paying insti-tutions.

• Preparing the returned check for automated processing by high-speed equipment as a “qualified return check” or “QRC”.

A “returning credit union” is a credit



union handling a returned check or notice in lieu of a returned check dis-cussed later in this section. If a return-ing credit union agrees to handle a returned check for expeditious return, the check must be returned within the two-day/four-day standard outlined above for paying institutions. Returning credit unions do not have an additional two-day period within which to return checks but must share the same two-day period with the paying institution or at least meet the forward collection test.

Under the two-day test, the returning credit union’s responsibility is as fol-lows:

• For institutions in the same check-processing region, a check must be returned to the depositary institution by 4 p.m. (local time of the depositary institution) on the second business day after the banking day on which the check was presented to the paying institution.

A returning credit union will gener-ally not have firsthand knowledge of the day a check was presented to the paying institution, but must nevertheless return the check within the two-day period.

Forward collection test

Because there are certain limited cases when the two-day time period cannot realistically be met, the Federal Reserve Bank included an alterna-tive test to meet the expeditious return requirement — the “forward collection” test. Under this test, a paying credit union (or returning credit union) returns a check expeditiously if it returns a check by means as swift as the means a similarly situated institution would use

for the forward collection of a check.A “paying credit union” must handle,

route, and transport a returned check in a manner designed to be at least as fast as a similarly situated institution would collect a forward collection check of similar amount, drawn on the depositary institution, and received for deposit by a branch of the paying credit union or sim-ilarly situated institution by noon on the banking day following the banking day of presentment of the returned check.

A “similarly situated paying insti-tution” (other than a Federal Reserve Bank) is a paying institution of similar asset size, in the same community, and with similar volumes of checks for collection. For example, if a check is presented to a paying credit union on Monday, and the depositary institution and the paying credit union are partici-pants in the same clearinghouse, the paying credit union should arrange to have the returned check received by the depositary institution by Wednesday. This would be the same day the paying credit union would deliver a forward col-lection check to the depositary institu-tion if the paying credit union received the check by noon on Tuesday.

In meeting the requirements of the forward collection test the paying credit union is responsible for its own actions but not those of the depositary institu-tion or returning institution. For exam-ple, if the paying credit union starts the return of the check in a timely manner but return is delayed by a returning insti-tution, generally the paying credit union has met its responsibilities.

The paying credit union is free to use a method of return other than the method it uses in forward collection as



long as the alternate method results in delivery of the returned check to the depositary institution as quickly as the forward collection of a check drawn on the depositary institution.

For “returning credit unions,” the forward collection test is similar to the forward collection test for paying credit unions. A returning credit union must handle a returned check in the same manner that a similarly situated collect-ing institution would handle a check of similar amount, drawn on a depositary institution and received for forward col-lection by the similarly situated insti-tution at the time the returning credit union received the check. For example, when a returning credit union delivers its forward collection checks by courier, the returning credit union would not meet its duty of expeditious return by mailing the returned checks. The returning credit union must return a check to the deposi-tary institution by courier or other means as fast as a courier.

A returning credit union may set a cutoff hour for the receipt of returned checks that is earlier than the similarly situated institution’s cutoff hour for checks received for forward collection, as long as the cutoff hour is not earlier than 2 p.m. A returning credit union may also set different sorting require-ments for returned checks than those applicable to other checks.

For example, if a returning credit union receives a returned check by its cutoff hour for returned checks on Monday, and the depositary institution and the returning credit union are par-ticipants in the same clearinghouse, the returning credit union should arrange to have the returned check received by

the depositary institution by Tuesday. This would be the same day that it would deliver a forward collection check drawn on the depositary institution and received by the returning credit union at a corresponding forward collection cut-off hour on Monday.

Qualified return checks

One means a paying credit union or returning credit union may use to handle returned checks in an expeditious man-ner is to convert a returned check to a qualified return check (QRC). A QRC is a check that is prepared for handling by automated check processing equipment for return to the depositary institution.

A credit union “qualifies” a returned check by either placing the check in a carrier envelope or by attaching to the bottom of the check a strip encoded in magnetic ink with the routing num-ber of the depositary institution, the amount of the check, and a special return-item identification. This iden-tification is a “2” in position 44 of the MICR line as a return identifier in accordance with the American National Standard Specifications for Placement and Location of MICR Printing, X9.13. (September 1983).

Normally, paying credit unions will be able to convert a check to a QRC any time after the determination is made to return the check until late in the day following presentment, while a return-ing credit union may receive returned checks late on one day and be expected to dispatch them early the next morning. Because of the short time that a return-ing credit union has to dispatch returned checks, if the credit union converts a returned check the credit union is given



a one-business-day extension in the time for expeditious return under the forward collection text.

A returning credit union that quali-fies a returned check is also given a one-business-day extension in its responsibility to return a check within the deadlines required by the UCC and Regulation J. However, a paying credit union’s responsibility to return a check under those same deadlines are not affected by returning QRCs.

Notice in lieu of return

If a check is lost or otherwise unavail-able for return, the paying credit union or returning credit union may send a notice in lieu of return. A paying or returning credit union may send a copy of the front and back of the returned check in place of the returned check or, if no such copy is available, a written notice of nonpay-ment. The copy or notice must clearly state that it constitutes a notice in lieu of return. Notice by telephone, telegraph, or other electronic transmission does not satisfy this requirement. However, a legible facsimile or similar image trans-mission of both sides of the check would suffice. This requirement that the notice is a substitute for the returned check is necessary so that the returning and depositary institutions are informed that the notice carries value. A paying credit union or returning credit union that sends a notice in lieu of return warrants that the original check has not been and will not be returned.

A notice in lieu of return is consid-ered a returned check for settlement purposes and is subject to the expedi-tious return requirements. If the origi-nal check is over $2,500, the notice

of nonpayment is still required, but may be satisfied by the notice in lieu of return if it meets the time and informa-tion requirements of the notice of non-payment.

Paying credit union’s identification of returned check

Regulation CC requires paying credit unions to use some form of a stamp indicating the reason for the return. No particular form is required, but a paying credit union returning a check shall clearly indicate on the face of the check that it is a returned check and the reason for the return. A check is identified as a returned check by a reason-for-return stamp even though the stamp does not specifically state that the check is a returned check. A reason such as “Refer to Maker” is permis-sible in appropriate cases. If the paying credit union places the returned check in a courier envelope, the courier enve-lope should indicate that it is a returned check but need not repeat the reason for the return if it appears on the check.

Depositary credit unions — responsibility for returned checks

Accepting returned checks

Consistent with the requirements encouraging expeditious return of checks, Regulation CC specifies when the depositary credit union is required to accept returned checks and written notices of nonpayment. There are four locations where the depositary credit union must accept returned checks:

1. A location at which it requests



presentment of forward collection checks such as a check process-ing center. In most cases, credit unions should be able to tell from the endorsement where the depos-iting institution prefers to accept returned checks. In any event, the paying or returning institution may ask the depositing institution where it prefers to accept returned checks.

2. At the address of the depositary institution shown in the endorse-ment. If the address is too general to identify a particular location, then returned checks must be accepted at any branch or head office consistent with the address. For example, many depositary credit union endorsements only list the city and state (for example, Seattle, Wash.) so returned checks must be accepted at any branch within the city listed.

3. If no address (city and state) appears in the depositing credit union’s endorsement, returned checks must be accepted at any branch or head office associated with the depositary credit union’s routing number. The depositary credit union endorsement stan-dards require the address be listed, so this provision will apply in lim-ited situations when the depositary credit union has failed to provide a proper endorsement.

4. For endorsements with no rout-ing number or address, returned checks must be accepted at any branch or head office of the credit union. Again this provision will only

apply when the depositary credit union fails to provide a proper endorsement. A depositary credit union may require returning or pay-ing institutions who are returning checks to separate the returned checks from the forward collection checks.

Payment

The depositary credit union must pay for a returned check by the close of the banking day on which it received the returned check. A paying or a returning institution returning a check does not obtain credit for a returned check by a charge-back but gets paid upon present-ment. The depositary credit union’s obli-gation to pay a returned check is similar to the paying credit union’s obligation to pay a forward collection check.

The depositary credit union may establish a cutoff hour, generally not earlier than 2 p.m., and treat checks received after that hour as being received on the next banking day. If the depositary credit union is unable to make payment to a returning or paying institution on the banking day that it receives the returned check (for exam-ple, the credit union’s closed for holiday or a check is received after the close of the Fed wire), payment may be made on the next banking day of the credit union receiving payment.

Payment must be made so that funds are available for use by the institution returning the check to the depositary credit union. Payment can be made by cash, a wire transfer indicating the pur-pose of the payment or net settlement arrangement, or other form of payment acceptable to the returning or paying



institution.

Misrouted returned checks

If a credit union receives a returned check or written notice of nonpayment in error, the credit union may send the misrouted returned check or notice to the correct depositary institution, if it can identify that credit union. In this case, the credit union acts as a return-ing credit union and can send the returned check either directly to the cor-rect depositary institution or through a returning institution agreeing to handle the item expeditiously. Or, the credit union receiving the misrouted returned check or notice can send the check back to the sending institution. The credit union receiving the misrouted check is required to act promptly but is not required to meet the expeditious return requirements. However, it must act within its midnight deadline. The credit union receiving the misrouted returned check may receive settlement for the check from the institution to which it returns the check, unless the check was originally received without charge.

Charges

A depositary credit union is prohibited from charging any form of a present-ment fee for returned checks. Because a returning credit union may charge a fee for handling returned checks, if the returning credit union receives a mixed-cash letter of returned checks and checks for which it is the depositary credit union, a flat fee may be applied to all the returned checks in the cash letter. However, in the case of a sorted cash letter, no fee can be charged.

Notice of nonpayment

Providing notice

If a paying credit union decides not to pay a check in the amount of $2,500 or more, it must provide notice of non-payment so that the notice is received by the depositary institution by 4 p.m. (local time) on the second business day following the banking day of present-ment. This requirement is not limited to checks of $2,500 or more handled by the Federal Reserve Bank but applies to all checks of $2,500 or more. The pay-ing credit union may rely on the amount encoded on the check in magnetic ink to determine the amount. If the day the paying credit union is required to provide notice is not a banking day for the depositary institution, receipt of the notice on the depositary institution’s next banking day is considered timely notice.

The notice of nonpayment may be pro-vided by any reasonable means, including the returned check, a written notice with a copy of the check, telephone, Fedwire, telex, or other form of telegraph. In many cases the return of the check can be made in time to meet the requirements for providing the notice.

Content of notice of nonpayment

The notice of nonpayment must con-tain the following information:

• Name and routing number of the paying credit union.

• Name of the payee(s).

• Amount.

• Date of the endorsement of the depositary institution.



• Account number of the member(s) of the depositary institution.

• Branch name or number of the deposi-tary institution from its endorsement.

• Trace number associated with the indorsement of the depositary institution.

• Reason for nonpayment.

The notice may also include other information from the check that might be useful in identifying the check being returned and the member. A written notice must include the name and rout-ing number of the depositary institu-tion from its endorsement. If the paying credit union is not sure of an item of information, it must include the required information to the extent possible and identify any questionable information with question marks.

If the paying credit union cannot identify the depositary institution from the check, it may send the notice to the collecting institution (earliest in the collection chain) so it can identify and indicate that the notice is not being sent to the depositary institution. The collect-ing credit union may be able to identify the depositary institution but is under no duty to do so.

Acceptance of notice

In the case of a written notice, such as the returned check, the depositary credit union is required to accept notices at the locations specified for accepting returned checks (the location preferred by deposi-tary credit union for presentment or loca-tion indicated in its indorsement).

In the case of telephone notices, the depositary credit union shall accept notices during its banking day at the

telephone (telegraph) number indicated in its endorsement or if no number appears or if the number is illegible, the general number of the branch indicated in the endorsement or any other number held out by the credit union for receipt of notices of nonpayment. Credit unions may transfer calls or use recording devices in handling these notices. Also, credit unions may vary by agreement the location and manner in which notices are received.

Notification of member

When a depositary credit union receives a returned check or a notice of nonpayment, it shall send to, or notify its member of, nonpayment by midnight of the banking day following the bank-ing day on which it received the returned check or notice (or a later reasonable time). Since a credit union’s receipt of a notice of nonpayment may constitute a reasonable cause to doubt collectibil-ity of funds, the notice of nonpayment may be used to satisfy the Notice of Exception for invoking the reasonable cause exception, if the notice of non-payment includes the funds-availability information for that notice.

Warranties by the paying credit union and the returning credit union

Regulation CC provides warranty pro-visions for paying and returning credit unions in the return check process. These basically track the warranties in the forward collection process and enable credit unions to make claims against prior institutions in the return endorse-ment chain to the party responsible for



the breach of warranty. The warranty pro-visions cover checks and notices on non-payment, as well as damages and tender-of-defense for breaches of warranty.

Warranties and returned checks

Each paying credit union or returning credit union that transfers a returned check and receives a settlement or other consideration gives certain warranties to the transferee returning credit union, to any subsequent returning institution, to the depositary institution, and to the owner of the check. These include the following:

• The paying credit union returned the returned check within its midnight deadline under the UCC §§4-301 and 4-302, Regulation J §210.12 (12 CFR Part 210), or the extension for expedit-ed delivery under Reg. CC 229.30(c). This warranty does not extend to whether a paying credit union has complied with the expeditious return requirements.

• The paying credit union or other returning credit union is authorized to return the check.

• The returned check has not been materially altered.

• In the case of a notice in lieu of return, the original check has not been and will not be returned. This provides protec-tions to the depositary credit union sim-ilar to those ordinarily provided through a separate indemnity agreement.

These warranties are not made with respect to U.S. Treasury, Postal Service, and state or local government checks.

Warranty of notice of nonpayment

Regulation CC provides warranties or Notice of Nonpayment that are designed to give the depositing credit union con-fidence in relying on such notices. Each paying credit union warrants to the transferee institution, to any subsequent transferee institution, to the deposi-tary institution, and to the owner of the check that:

• The paying credit union returned or will return the check within its mid-night deadline under the UCC §§4-301 and 4-302.

• The paying credit union is authorized to send the notice of nonpayment.

• The check has not been materially altered.

These warranties are not made with respect to U.S. Treasury, Postal Service, and state and local government checks.

Endorsement Standards

The endorsement standards are designed to facilitate faster handling of returned checks. Generally, these stan-dards are designed to preserve a space on the back of a check exclusively for the endorsement of the depositary credit union. These standards also set require-ments for subsequent collecting institu-tions and returning institution endorse-ments and liability provisions for losses resulting from the failure to adhere to the standards.

Applicability of endorsement standards



Compliance with the endorsement standards is required, in some form, for virtually every institution in the forward collection and return check process. The standards would apply to any credit union that:

• Accepts items for deposit or cash.

• Is involved in the forward collection process.

• Accepts deposits of return items for subsequent presentment to another returning institution or depositary institution.

Regulation CC requires credit unions to use a standard form of endorsement during the forward collection and return process. This standard includes require-ments for the location, content, and color of ink of the endorsement.

Depositary credit union endorsement

The primary focus of the endorsement standards is to protect the readability of the depositary credit union endorse-ment. This is important in light of the return deadlines and procedures under which a returned check may bypass sub-sequent collecting institutions and be returned directly to the depositary credit union. Depositary credit unions have a unique endorsement standard which generally includes more information than the other endorsements.

Location

The depositary credit union endorse-ment must be located in the space on the back of the check that is three inch-es from the leading edge and one and

one-half inches from the trailing edge of the check. The standard does not require that the entire depositary credit union endorsement be within the speci-fied area, but only that the nine-digit routing number be wholly contained in this area. However, placing the entire endorsement in this area protects it from being over-stamped by later endorse-ments. Any subsequent collecting or returning institution must ensure that its endorsement does not encroach upon this space.

Content

The depositary credit union endorse-ment must contain the following infor-mation:

• The credit union’s nine-digit routing number (set off by arrows at each end of the number toward the number).

• The credit union name and location.

• The endorsement date.

• The location requirement refers to the city and state in which the credit union is located. A street address is not required, but the depositary credit union may wish to include that infor-mation in order to limit the number of locations where it must accept returned checks.

The standard permits the endorse-ment to include other identifying infor-mation, such as:

• The credit union’s fractional routing number.

• Repeating the credit union’s nine-digit routing number.

• The credit union’s telephone number



(for receipt of notices of large-dollar returns).

• The branch identification.

• The credit union’s trace sequence numbers.

Color

The endorsement of the depositary credit union must be in black ink. No other color is permitted.

Endorsement by other institutions

A depositary credit union may choose not to place its own identification in the endorsement. If the depositary credit union agrees with another institution to have the correspondent institution accept returned checks, the endorse-ment on the back of the check must identify the correspondent institution that will be acting as the receiver of the returned checks. The depositary credit union may endorse the check but must place its endorsement outside the space normally reserved for the deposi-tary credit union and in a color other than purple. However, this endorse-ment is not mandatory. The check will be returned and notice of nonpayment will be given to the credit union endors-ing as depositary credit union. Because the actual depositary credit union will want prompt notice of nonpayment, its arrangement with the endorsing institu-tion should provide for prompt notice of nonpayment.

Collecting credit union endorsement

Location

A subsequent collecting credit union may place its endorsement on the back of the check within the three-inch space between the leading edge of the check and the space for the depositary institu-tion’s endorsement. A collecting credit union must keep its endorsement within this space and not use other space on the check.

Content

The content of this endorsement is quite restricted. The collecting credit union can only place the following infor-mation in the required area:

• The credit union’s nine-digit routing number.

• The endorsement date.

• An optional trace sequence number on the check.

Traditional endorsements such as “P.E.G.” (prior endorsements guar-anteed) and “pay any bank” are not allowed. Again, Regulation CC and the UCC make such language unneces-sary as this language is implicit in the endorsement.

Color

Collecting credit unions must use black in their endorsement. All endorse-ments applied to original and substitute checks must be printed in black ink as of January 1, 2006.

Returning credit union endorsement

The Regulation does not specify any particular requirements for returning



credit unions, but they must comply with the following rules:

Location

The regulation prohibits the returning credit union from placing its endorse-ment in the areas reserved for the depositary institution and the payee. The returning credit union cannot place its endorsement in the space between three inches from the leading edge of the check to the trailing edge of the check but may place its endorsement on the back of the check in the space provided for the collecting institution or anywhere on the face of the check.

Content

There are no specific requirements or limitations for the content of the return-ing credit union’s endorsement.

Color

Similar to collecting credit unions, the returning credit union is prohibited from using any color other than black ink in its endorsement.

Carbon bands and other preprinted information

The regulation does not prohibit the backs of checks from containing carbon bands for use in transferring check information to a ledger. However, paying credit unions permitting mem-bers’ carbon-band checks may have an increased risk of liability. Checks may also bear preprinted information or other written matter such as contracts and security agreements or lien information. All endorsers are encouraged to arrange

their endorsements so as not to inter-fere with the carbon band. Preprinted contracts and other information must be placed so as not to obscure the deposi-tary and collecting institutions’ endorse-ments.

Liabilities and Defenses

Liability for return-check delays

The responsibility for loss resulting from a delay in the return of a check due to endorsements that are unread-able because of material on the back of the check is allocated to the institutions according to their endorsement respon-sibilities.

• Depositary credit union. The deposi-tary credit union is responsible for loss resulting from a delay in return caused by the condition of the check after its issuance until its acceptance by the depositary credit union that made endorsement illegible. For example, the payee’s endorsement may be mis-placed and obscure the depositary credit union’s endorsement. Depositary credit unions may protect themselves either by refusing to accept the check or shifting the risk to their mem-bers, by agreement such as a deposit account agreement.

• Paying credit union. A paying credit union will be liable for losses due to delay in return caused by endorse-ments that are not readable because of other material on the back of the check at the time it was issued. This means that if a credit union custom-arily issues checks with preprinted contract-restrictive endorsements or



carbon bands on the back, and the language or carbon band obscures or interferes with the space required for the depositary institution’s endorse-ment, the paying credit union would be liable for losses resulting from delays caused by such language. Again, the regulation allows the paying credit union to shift this risk to its members by agreement.

Liability for handling checks

• Liability for payment. A credit union that handles a check for forward col-lection or return is liable to any insti-tution that subsequently handles the check to the extent the subsequent institution does not receive payment for the check because of suspension of payments by another institution. For example, if a returning credit union returned a check to an insolvent depositary bank and did not receive the full amount of the check from the failed bank, the returning credit union could obtain the unrecuperated amount from any institution prior to it in the collection-and-return chain of endorsement, including the paying credit union. Because each institu-tion in the collection-and-return chain could recover from a prior institution, any loss would fall on the first collect-ing institution that received the check from the depositary institution.

• Recovery. When a check is returned through the same institutions used for the forward collection of the check, priority during the forward collection process controls over priority in the return process for determining prior

and subsequent institutions.

• Notice. A credit union’s liability for handling a check for collection or return arises regardless of whether the credit union’s endorsement appears on the check. However, a credit union seeking recovery against a prior institu-tion must send a notice to that prior institution reasonably promptly after it learns of facts entitling it to recov-ery. A written notice that reasonably identifies the check and the basis for recovery is sufficient if the check is

not available.

State Law

All state and federal chartered credit unions must comply with the funds-avail-ability provisions of Regulation CC. Credit unions in some states, however, may also be subject to state funds-availability provisions. While the regulation contains a federal law pre-emption provision, it is not a blanket provision. A state law in effect on or before Sept. 1, 1989, that provides for faster availability of funds deposited in an account, will supersede federal law. Prior to the regulation, a number of states enacted statutes that govern when credit unions in those states must make funds available to their mem-bers as well as the disclosure of their pol-icies. This section sets forth the general rules for determining whether a state law pre-empts regulation CC.

State laws adopted after Sept. 1, 1989, will not supersede federal law, even if they provide for shorter avail-ability periods than are provided under federal law. Also, if a state with a law



governing funds availability in effect before Sept. 1, 1989, amends its laws after that date, the amendment will not supersede federal law.

This interplay between state and fed-eral law is complicated, and you should consult your state league or your credit union’s general counsel.

Civil Liabilities and Defenses

Civil liability to individuals

A credit union may be liable to indi-vidual members for violating any of the disclosure or availability requirements under Subpart B. Alternatively, a credit union may be liable for failure to com-ply with any state funds-availability law which supersedes the federal law. An individual member, therefore, may sue a credit union either under federal or state law, whichever is applicable. However, an individual member would not have an action under both federal and state law.

Any violation of state or federal law may render the credit union liable for actual damages sustained by an indi-vidual member, plus attorneys’ fees and costs.

In addition to actual damages, a credit union may be liable for statutory damages in an amount to be determined by the court. Such damages would not be less than $100 but not greater than $1,000. It is not clear whether the stat-utory penalty will be levied just once if there is a series of violations connected to a single transaction. If Regulation CC is enforced similarly to other consumer regulations, each failure to comply with

any aspect of the regulations may yield the potential of a separate penalty. For example, if a credit union fails to make a required disclosure and fails to make the funds available at the required time on two separate occasions, the total number of violations will be three, with potential liability for statutory damages of up to $3,000. If such a situation should arise, it is possible to argue that the continued violation or series of viola-tions are in fact one violation and merit only one $1,000 fine.

Civil liability for class actions

A more serious concern for credit unions is the class-action lawsuit. These lawsuits can be brought for any failure to comply with the disclosure or availabil-ity requirements of Subpart B. There is no minimum recovery for each member of the class. The class as a whole can recover up to the lesser of $500,000 or 1% of the net worth of the credit union involved as well as the costs of bringing the lawsuit.

The factors a court will consider in determining a class-action award include:

• Amount of any actual damages awarded.

• Frequency and persistence of compliance failures.

• Resources of the credit union.

• Number of persons adversely affected.

• Extent to which the failure of the compliance was intentional.

Bona fide errors defense

One defense to individual or class-action lawsuits is that the credit union’s



violation arose out of a bona fide error. The term “bona fide error” is not defined in Regulation CC. However, the credit union must demonstrate by “the preponderance of the evidence” that the violation was not intentional and result-ed from a bona fide error, and that the credit union maintained procedures rea-sonably adapted to avoid such errors— or if the credit union failed to identify whether a payable-through check is local or nonlocal despite having identifica-tion procedures. Examples of bona fide errors include: clerical miscalculations, computer malfunctions, programming or printing errors, and failing to identify payable-through checks. Errors of legal judgment resulting in a failure to comply are specifically deemed not to be bona fide errors. Maintenance and backup procedures to ensure compliance will be especially important in meeting the bur-den of proof to show that the error was a bona fide error.

Limitation on actions

Individual or class actions must be brought within one year after the date of the violation. This one-year limitation is not technically a statute of limitations but rather a limit on the court’s subject mat-ter jurisdiction.

The one-year period begins the date of the occurrence of the violation. However, if violations cannot be discovered by the member until a later date, the one-year period may run from the date of discov-ery. For example, if a credit union fails to disclose the possibility it may place a hold using the reasonable-cause exception, the member will not discover this failure to disclose until payment of funds on a check

is actually withheld beyond the usual funds-availability schedule. The one-year period may begin to run at the date of dis-covery rather than the date of the failure to disclose.

Reasonable reliance defense

Compliance with any FRB rule, regu-lation, or official commentary provides an absolute defense to any liability. Therefore, use of any FRB form, clause, or notice for disclosures will relieve credit unions of liability for failure to properly disclose, as long as the dis-closure accurately reflects the credit union’s policy. The FRB has taken the position that to the extent a state-law provision pre-empts federal law with respect to the availability schedules, the particular state law provision must be disclosed. While the FRB made no pro-vision for this interpretation in Subpart B or in the model forms, clauses, and notices in Appendix C of the Regulation, the FRB has taken the position that a credit union’s modification of model dis-closures to properly reflect a state-law provision is a defense to liability.

Subsequent changes in the rules, regulations, or commentary, even if they are overruled or held invalid by a court, will not affect liability. Of course, once a particular rule, regulation, or commen-tary provision changes, subsequent reli-ance on the prior rule will not be a valid defense.

Return check liability

The regulation establishes separate liability provisions for the credit unions’ responsibilities in the collection and



return-check process under Subpart C. Civil liability, class action, and punitive damage provisions of Subpart B do not apply to the check collection and return requirements of Subpart C.

Standard of care

A credit union must exercise ordi-nary care and act in good faith in com-plying with these requirements. This standard of care applies to any credit union covered by Subpart C including: paying credit unions, returning credit unions, depositary credit unions, credit unions erroneously receiving a returned check or written notice of nonpayment as depositary credit unions, and credit unions endorsing checks.

Liability and measure of damages

A credit union that fails to exercise ordinary care or act in good faith may be liable to the depositary institution, the depositary institution’s members, the owner of the check, or another party to the check. The measure of damages for not meeting this standard of care is the amount of the loss incurred, up to the amount of the check, reduced by the amount of the loss the party would have incurred even if the credit union had exercised ordinary care. A credit union exercising ordinary care and acting in good faith will not be liable for the insol-vency, neglect, misconduct, mistake, or default of another institution or person, or for the loss or destruction of a check or notice of nonpayment in transit or in the possession of others.

Paying credit union liability

The standard of care and measure of damages described above does not

affect a paying credit union’s liability to its member for wrongful dishonor under UCC 4-402, which is different from the failure to exercise ordinary care and has a different measure of damages. If a paying credit union fails to make an expeditious return of a check and fails to comply with the deadline for returns under the UCC and Regulation J with a single nonpayment of a check, it may be liable for failure to meet either standard but not for failure to meet both.

Comparative negligence

The liability provisions for the return-check responsibilities carry a “pure” comparative negligence standard for liability. Comparative negligence will typically arise where a paying or returning credit union delays in returning a check because of the difficulty in identifying the depositary institution. For example, if a depositary institution fails to properly endorse a check and a paying or return-ing credit union is delayed in returning the check because of additional time required to identify the depositary institu-tion, then the paying or returning credit union’s liability to the depositary institu-tion would be reduced in proportion to the amount of negligence attributable to the depositary institution.

Responsibility for back of check

The paying credit union and deposi-tary credit union share the responsibility for keeping the back of the check clear for credit union endorsements during the forward collection and return process.

The paying credit union is responsible for the condition of the check when it is issued by it or its member. Thus, the



paying credit union is responsible for the adverse effect of a carbon band or pre-printed endorsement placed on the back of a check before issuance. Also, the pay-ing credit union may shift this responsi-bility to its member by agreement.

The depositary credit union is respon-sible for the condition of the check after it is issued and before it is accepted by the depositary credit union, as well as any condition of the check during its handling of the check. The depositary credit union would be responsible for the adverse effect of a stamp placed on the check by its member or a prior endorser. Of course, the depositary credit union may refuse to accept a check where the back is unreasonably obscured.

Administrative enforcement

Enforcement by NCUA and the FRB

The division of enforcement responsi-bility is similar to the enforcement under other FRB regulations. The NCUA has authority over all federal credit unions. The FRB may issue orders prohibiting any credit union, any Federal Reserve Bank, or any other persons subject to the authority of the FRB from engaging in any transaction with any noncomplying credit union regardless of whether the noncomplying credit union is directly under the FRB’s authority.

Enforcement powers

The applicable federal agencies have the same powers to enforce Regulation CC as they have to enforce other regula-tions for institutions under their control. These agencies may exercise any powers necessary to enforce compliance with the

regulation within the scope of their gen-eral authority. This means these agencies may propose their own regulations if nec-essary to implement, enforce, and moni-tor compliance with Regulation CC.

Record retention

Regulation CC requires credit unions retain “evidence” of compliance with the regulations for at least two years. If the credit union has actual notice that it is being investigated or is subject to any enforcement proceeding, the credit union must retain its records beyond this two-year period. Records can be stored by microfiche, microfilm, magnetic tape, or any other method capable of accu-rately retaining and reproducing such information.

Credit unions are required to retain records showing disclosures were given to each member but need not retain copies of the disclosures given to each member. Instead, credit unions are required to retain evidence demonstrat-ing their procedures reasonably ensure the members receive the required dis-closures. A credit union’s policy manual containing written procedures designed to ensure full disclosure should meet this requirement.

Credit unions are required to retain copies of each notice provided to mem-bers invoking the reasonable-cause exception as well as the brief description of the facts giving rise to the availability of that exception.

Check 21 amendments

Check clearing for the 21st Century Act (Check 21) authorizes the use of a



new negotiable instrument called a sub-stitute check and facilitates the use of electronic check processing.

A substitute check is a paper repro-duction of an original check that con-tains an image of the front and back of the original check and is suitable for automated processing just like the original check. It will have a MICR line with information from the original check or share draft and will conform to the industry standards. A substitute check must include the following legend: “This is a legal copy of your check. You can use it in the same way you would use the original check.” A properly prepared substitute check is considered the legal equivalent of the original check for all purposes. Credit unions are not required to create substitute checks or accept checks electronically, but are required to accept substitute checks in most circumstances. See Appendix 4-C for a Sample Substitute Check.

Check 21 requires that credit unions provide disclosures to their members who receive substitute checks that out-line the new warranties and indemnities that protect them from any losses that arise from receiving a substitute check instead of the original.

There are also new rights for consum-ers who receive substitute checks. The first provides a process for receiving an expedited recredit when there is a prob-lem with a substitute check. The second requires credit unions to provide disclo-sures explaining substitute checks and the members’ recrediting rights.

Substitute check warranties

Credit unions that process or return substitute checks (or a paper or elec-

tronic version of a substitute check) makes the following warranties that:

1. the substitute check meets the legal equivalence requirement (in other words—it is the legal equivalent of the original check), and

2. no financial institution or person will be asked to make a payment based on a check that has already been paid.

These substitute check warranties are made to any person the credit union transfers, presents, or returns the substi-tute check to.

Substitute check indemnity

Credit unions that process or return a substitute check indemnifies any recipient for any loss incurred if that loss is due to the receipt of the substi-tute check instead of the original check. If the loss is the result of a breach of a substitute check warranty, the amount of the indemnity will be the amount of the loss including interest, costs, reason-able attorney’s fees, and other expenses caused by that breach of warranty.

However, if the loss is not the result of a breach of a substitute check warranty, the amount will be the amount of any loss up to the amount of the substitute check plus interest and expenses includ-ing costs and reasonable attorney’s fees and other expenses related to the sub-stitute check. The total amount in either case can be reduced in proportion to the amount of negligence or bad faith attrib-uted to the indemnified party.

These indemnity provisions are intended to put the parties back to the position they would have been had they received the original check instead of



the substitute check. The amount of the indemnity can be satisfied by either pay-ing the amount of the indemnity or by producing the original check or a copy of the original check. If the original check is produced, the indemnifying party is only liable for any loss incurred up to the time that original is provided. Also, any funds already paid under the indemnity that exceed the losses incurred up to the time of production of the original check may be recovered.

Expedited Recredit

Special expedited recredit rights are provided for credit union members who suffer a loss or have a warranty claim because of a substitute check. A claim for a recredit can be made if the member (in good faith) feels that:

• their account was incorrectly charged for a substitute check or they have a warranty claim,

• an actual loss was suffered, and

• the original check or a copy is neces-sary to determine if the substitute check was improperly charged or the warranty claim is valid.

An expedited recredit claim must be made within 40 calendar days of either:

1. the date the credit union delivered the account statement containing the dis-puted charge or

2. the date the substitute check was pro-vided to the member, whichever is later.

Credit unions are required to inves-tigate these claims. The claim must be resolved within 10 business days after the banking day it is received or the

member must be given a recredit for the amount of the substitute check, up to $2,500 pending completion of the investigation. In either case, the member must receive a notice. The investigation must be completed and a final determi-nation made within 45 days with a final recredit of the funds when necessary.

You can require these claims be made in writing or allow them to be sent to you electronically. If you require a written claim, you must inform anyone making a verbal claim of this requirement. You are also allowed to put into place a require-ment that the written claim be made within 10 business days after the bank-ing day the verbal claim was received. But again, you must let your member know about this 10-day requirement.

The clock for acting on the claim begins ticking on the banking day the written claim is received.

Consumer awareness disclosures

The following situations require that awareness disclosures be given to your members. A model disclosure is includ-ed with the final rule that provides a safe harbor to credit unions who use it. See Appendix 4-D for model language provided by the Check 21 Act or notices and disclosures.

Credit unions that return paid origi-nal checks/share drafts or paid substi-tute checks with the periodic account statements should have provided these disclosures no later than the first regu-larly scheduled mailing after Oct. 28, 2004. Any members opening share draft accounts for which they will receive their original paid checks or paid substitute



checks after Oct. 28, 2004, must also be given these disclosures.

Each time a member receives a sub-stitute check “on an occasional basis” (for example when an original check is requested but a substitute check is pro-vided or a bad check is returned in the form of a substitute check) the aware-ness disclosure must be sent with that substitute check.

Remotely Created Checks

A “Remotely Created Check” is a check that:

• is authorized by a consumer over the telephone,

• is not created by the paying financial institution,

• is not signed by the member on whose account the check is drawn, and

• bears a legend on the signature line, such as “Authorized by Drawer.”

Remotely created checks are also called “telechecks,” “preauthorized drafts,” and “paper drafts.” Instead of a signature, the check typically has the customer’s printed or typed name, or bears a statement that the customer authorized the check.

Currently, a remotely created check is subject to Articles 3 and 4 of the Uniform Commercial Code (UCC). The provisions of the UCC reflect that draw-ees of checks must bear the economic loss when the checks are not properly payable because the drawer did not authorize them. This is because the pay-ing institution, not the depositary insti-tution, is in the best position to judge whether the signature on the check is the authorized signature of its customer.

However, remotely created checks do not have a signature to compare.

Regulation CC was modified to pro-vide that any institution that transfers, collects, or presents a remotely created check would warrant that the person on whose account the check is drawn authorizes the amount stated on the check, and issuance to the payee stated on the check.

The transfer and presentment warran-ties would apply only to institutions shift-ing liability to the depositary institution. A paying institution would not be able to assert a warranty claim directly against the nonbank payee that created or trans-ferred an unauthorized remotely created check, but would have a claim under other law. This is different than the UCC provisions, which apply to anyone that transfers a remotely created check.

The regulation and the commentary to the final rule provide a defense to a warranty claim. The depositary bank may defend a remotely created check war-ranty claim by proving that the member cannot assert a UCC claim against the paying bank for the unauthorized issu-ance of the check.

Traditional forged checks are excluded from these new warranties. Additionally, Regulation J was amended to make clear that the new remotely cre-ated check warranties apply to remotely created checks collected through the Federal Reserve Banks.



Appendix 4-A

Deposit Hold Notice


For notices mailed to member:

Date mailed:Prepared by:

© CUNA Mutual Group 1993, 2006 All Rights Reserved D24002-E

Deposit Hold Notice DATE OF DEPOSIT DEPOSIT AMOUNT AMOUNT HELD CHECK NO(S). MEMBER NO.

$ $

We are delaying the availability of funds from your deposit. These funds will be available as indicated below. Even if we make funds available to you, you are responsible for and must repay us for any checks you deposit that are returned to us unpaid for any reason.

ADDITIONAL HOLD INFORMATION Case by Case Hold* - We reserve the right to impose holds on checks on a case by case basis. We have decided to exercise this right with respect to the check(s) you have deposited.

Exception Hold A check you deposited was previously returned unpaid.

Your account has been repeatedly overdrawn. The items you deposited on this day exceed $5,000.

An emergency, such as a computer failure, has occurred.

We believe a check you deposited will not be paid for the reason(s) marked below.*

We received notice that the check is being returned unpaid. There are erasures or other apparent alterations on the checks.

The check you deposited is postdated or has a stale date. The routing number of the paying bank is not a current routing number.

We have confidential information indicating that the check may not be paid. Information from the paying bank indicates that the check may not be paid.

The check is drawn on an account with repeated overdrafts. We have been notified that the check has been lost or damaged in collection.

We are unable to verify the endorsement of a joint payee. Some information on the check is not consistent with other information on the check.

Other:

AVAILABILITY OF YOUR DEPOSIT $ will be available on the business day after the day of the deposit. *If you did not receive this notice at the time you made the deposit and

the check(s) you deposited is paid, we will return to you any fees for any overdrafts or return checks that result solely from the additional delay we are imposing. For refund information, contact us at the address or call us at the telephone number shown on this notice.

$ will be available on the business day after the day of the deposit.





Appendix 4-B

Funds Availability Policy



FUNDS AVAILABILITY POLICY DISCLOSURE This Disclosure describes your ability to withdraw funds from all your accounts at ABC Federal Credit Union except for funds deposited to certificate accounts. The Credit Union reserves the right to delay the availability of funds deposited to certificate accounts for periods longer than those disclosed in this policy. Please ask us if you have a question about which accounts are affected by this policy.

1. GENERAL POLICY — Our policy is to delay the availability of funds from your check and check deposits. During the delay, you may not withdraw the funds in cash and we will not use the funds to pay checks that you have written.

2. DETERMINING THE AVAILABILITY OF A DEPOSIT — When we delay the availability of a deposit the length of the delay is determined by counting the business days from the day of your deposit. Every day is a business day except Saturdays, Sundays and federal holidays. If you make a deposit before 5:00 p.m. on a business day that we are open, we will consider that day to be the day of your deposit. However, if you make a deposit after our cutoff hour or on a day we are not open, we will consider that the deposit was made on the next business day we are open.

The length of the delay varies depending on the type of deposit and is explained below.

3. SAME-DAY AVAILABILITY — Funds from electronic direct deposits to your account as well as funds from the following deposits will be available on the same business day that we receive the deposit:

• U.S. Treasury checks that are payable to you • Wire transfers • Checks drawn on ABC Federal Credit Union

4. SAME-DAY AVAILABILITY FOR CERTAIN DEPOSITS MADE IN PERSON — Funds from the following deposits are available on the same business day that we receive your deposit, if you make the deposit in person to one of our employees:

• Cash • State and local government checks that are payable to you • Cashier’s, certified, and teller’s checks that are payable to you, if you use a special deposit slip available from

each teller location • Federal Reserve Bank checks, Federal Home Loan Bank checks, and postal money orders, if these items are

payable to you

If you do not make your deposit in person to one of our employees (for example, if you mail the deposit), funds from these deposits will be available by the second business day after the day we receive your deposit.

5. AVAILABILITY OF OTHER CHECK DEPOSITS — The first $200.00 from a deposit of other checks will be available by the first business day after the day of your deposit. The remaining funds will be available by the second business day after the day of your deposit. For example, if you deposit a local check of $700.00 on a Monday, $200.00 of the deposit will be available by Tuesday. The remaining $500.00 will be available by Wednesday.

6. HOLDS ON OTHER FUNDS — If we cash a check for you that is drawn on another financial institution, we may withhold the availability of a corresponding amount of funds that are already in your account. Those funds will be available at the time funds from the check we cashed would have been available if you had deposited it. If we accept for deposit a check that is drawn on another financial institution, we may make funds from the deposit available for withdrawal immediately but delay your availability to withdraw a corresponding amount of funds that you have on deposit in another account with us. The funds in the other account would then not be available for withdrawal until the time periods that are described elsewhere in this Disclosure for the type of check that you deposited.

7. LONGER DELAYS MAY APPLY — We may delay your ability to withdraw funds deposited by check into your account an additional number of days for these reasons:

• We believe a check you deposit will not be paid. • You deposit checks totaling more than $5,000.00 on any one (1) day. • You deposit a check that has been returned unpaid. • You have overdrawn your account repeatedly in the last six (6) months. • There is an emergency, such as failure of communications or computer equipment.

We will notify you if we delay your ability to withdraw funds for any of these reasons and we will tell you when the funds willbe available. They will generally be available no later than the seventh business day after the day of your deposit.



Appendix 4-C

Substitute Check



Appendix 4-D

Check 21 Model Notices and Disclosures

C–5A––Substitute Check Policy Disclosure Substitute Checks and Your Rights

[IMPORTANT INFORMATION ABOUT YOUR CHECKING ACCOUNT]

Substitute Checks and Your Rights

What is a substitute check? To make check processing faster, federal law permits banks to replace original

checks with “substitute checks.” These checks are similar in size to original checks with a slightly reduced image of the front and back of the original check. The front of a substitute check states: “This is a legal copy of your check. You can use it the same way you would use the original check.” You may use a substitute check as proof of payment just like the original check.

Some or all of the checks that you receive back from us may be substitute checks. This notice describes rights you have when you receive substitute checks from us. The rights in this notice do not apply to original checks or to electronic debits to your account. However, you have rights under other law with respect to those transactions.

What are my rights regarding substitute checks? In certain cases, federal law provides a special procedure that allows you to request

a refund for losses you suffer if a substitute check is posted to your account (for exam-ple, if you think that we withdrew the wrong amount from your account or that we withdrew money from your account more than once for the same check). The losses you may attempt to recover under this procedure may include the amount that was withdrawn from your account and fees that were charged as a result of the withdrawal (for example, bounced check fees).

The amount of your refund under this procedure is limited to the amount of your loss or the amount of the substitute check, whichever is less. You also are entitled to interest on the amount of your refund if your account is an interest-bearing account. If your loss exceeds the amount of the substitute check, you may be able to recover additional amounts under other law.

If you use this procedure, you may receive up to (amount, not lower than $2,500) of your refund (plus interest if your account earns interest) within (number of days, not more than 10) business days after we received your claim and the remainder of your refund (plus interest if your account earns interest) not later than (number of days, not more than 45) calendar days after we received your claim.



We may reverse the refund (including any interest on the refund) if we later are able to demonstrate that the substitute check was correctly posted to your account.

How do I make a claim for a refund?

If you believe that you have suffered a loss relating to a substitute check that you received and that was posted to your account, please contact us at (contact informa-tion, for example phone number, mailing address, e-mail address). You must contact us within (number of days, not less than 40) calendar days of the date that we mailed (or otherwise delivered by a means to which you agreed) the substitute check in ques-tion or the account statement showing that the substitute check was posted to your account, whichever is later. We will extend this time period if you were not able to make a timely claim because of extraordinary circumstances.

Your claim must include:

• A description of why you have suffered a loss (for example, you think the amount withdrawn was incorrect);

• An estimate of the amount of your loss;

• An explanation of why the substitute check you received is insufficient to confirm that you suffered a loss; and

• A copy of the substitute check [and/or] the following information to help us identify the substitute check: (identifying information, for example the check number, the name of the person to whom you wrote the check, the amount of the check).

C–22—Expedited Recredit Claim, Valid Claim Refund Notice Notice of Valid Claim and Refund

We have determined that your substitute check claim is valid. We are refunding (amount) [of which [(amount) represents fees] [and] [(amount) represents accrued interest]] to your account. You may withdraw these funds as of (date). [This refund is the amount in excess of the $2,500 [plus interest] that we credited to your account on (date).]

C–23—Expedited Recredit Claim, Provisional Refund Notice Notice of Provisional Refund

In response to your substitute check claim, we are refunding (amount ) [of which [(amount) represents fees] [and] [(amount) represents accrued interest]] to your account, while we complete our investigation of your claim. You may withdraw these funds as of (date). [Unless we determine that your claim is not valid, we will credit the remaining amount of your refund to your account no later than the 45th calendar day after we received your claim.]



If, based on our investigation, we determine that your claim is not valid, we will reverse the refund by withdrawing the amount of the refund [plus interest that we have paid you on that amount] from your account. We will notify you within one day of any such reversal.

C–24—Expedited Recredit Claim, Denial Notice Denial of Claim

Based on our review, we are denying your substitute check claim. As the enclosed (type of document, for example original check or sufficient) shows, (describe reason for denial, for example the check was properly posted, the signature is authentic, there was no war-ranty breach).

[We have also enclosed a copy of the other information we used to make our deci-sion.] [Upon your request, we will send you a copy of the other information that we used to make our decision.]

C–25—Expedited Recredit Claim, Reversal Notice Reversal of Refund

In response to your substitute check claim, we provided a refund of (amount) by crediting your account on (date(s)). We now have determined that your substitute check claim was not valid. As the enclosed (type of document, for example original check or sufficient copy) shows, (describe reason for reversal, for example the check was properly posted, the signature is authentic, there was no warranty breach). As a result, we have reversed the refund to your account [plus interest that we have paid you on that amount] by withdrawing (amount) from your account on (date).

[We have also enclosed a copy of the other information we used to make our deci-sion.] [Upon your request, we will send you a copy of the information we used to make our decision.]



Regulation CC: Availability of Funds and Collection of Checks

Quiz/Study Guide

1. In general, Regulation CC requires that funds from certain types of deposits be given next-day availability. List five of the eight types of deposits named in the regulation.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

2. A notice that funds deposited to an account may not be immediately available must be posted at all ATMs where deposits can be made. What is the timing for this notice and what are three ways the notice can be given?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

3. When must the funds from local checks be available for withdrawal?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

4. Does the fact that an ATM is considered nonproprietary make any difference to the availability of a funds deposited at that ATM?

_____________________________________________________________________

_____________________________________________________________________



5. Regulation CC provides safeguard exception holds that can be applied to a member’s deposit. List three of them.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

6. The hold on a deposit can be extended for accounts that are repeatedly overdrawn. Briefly describe the two tests provided by Regulation CC to determine what constitutes “repeated overdrafts.”

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

7. When invoking the reasonable cause exception, what is the additional statement that must be included in the notice sent to the member?

_____________________________________________________________________

_____________________________________________________________________

8. When a new account is opened, when are you required to provide the Funds Ability Policy disclosure?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

9. If your credit union changes its funds availability policy, describe the timing of the required change in terms notice.

_____________________________________________________________________

_____________________________________________________________________



10. If one of the safeguard exceptions holds is placed on a deposit, what information must be contained in the required notice?

_____________________________________________________________________

_____________________________________________________________________

11. If a credit union places a new account hold on a deposit, how long can the funds from local and nonlocal checks be held?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

12. Your credit union truncates checks and does not return them to your members with their periodic statements. Because of this you are only required to send the Check 21 notice outlining their rights any time you provide a substitute check instead of an original.

_____ True _____False

13. Under Check 21, a substitute check must meet certain requirements. List four of those requirements.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



Regulation CC: Availability of Funds and Collection of Checks

Answer Key

1. Cash deposits made at a staffed teller facility; electronic payments; U.S. Treasury checks; U.S. Postal money orders deposited at a staffed teller facility into the account of the payee; Federal Reserve Bank and Federal Home Loan Bank checks deposited at a staffed teller facility in the account of the payee; state and local government checks deposited in a credit union in the same state as the unit of government; cashier’s, certified, and teller’s checks deposited at a staffed teller facility into the account of the payee; on-us checks deposited at a branch of the depositary credit union if located in the same state or check processing region. (Pages 4-3 to 4-4)

2. The notice must be given before the deposit is made and can be 1) posted on a sign at the ATM, 2) be shown on the ATM screen, and 3) be printed on deposit envelopes provided at the ATM. (Page 4-21)

3. Not later than the second business day following the day of deposit. (Page 4-8)

4. All deposits at nonproprietary ATMs shall be available by the fifth business day after the banking day the deposit is made. (Page 4-8)

5. Large deposits; redeposited checks; repeated overdrafts; reasonable cause to doubt collectibility; emergency conditions; new accounts. (Page 4-9 to 4-13)

6. Test one — the account or combination of accounts has had a negative balance (or would have had a negative balance if checks had been paid and not returned) on six or more banking days in the preceding six months.

Test two — the account had or might have had a negative balance of $5,000 or more on two or more banking days. (Page 4-10 to 4-11)

7. The reason the credit union believes the check is uncollectible. (Page 4-11)

8. Prior to accepting the deposit to open the new account. If opened by mail, the disclosure must be mailed no later than the business day following the banking day the deposit was made. (Page 4-16)



9. A change in terms notice must go out to members 30 days prior to the change unless that change results in faster availability of deposits. This change would require the notice to be mailed within 30 days after the change takes effect. (Page 4-18)

10. The member’s account number; the date of the deposit; the deposit amount being held; the reason the exception was invoked. (Page 4-19)

11. The length of the hold is up to the discretion of the credit union. (Page 4-13)

12. True (Page 4-39)

13. Substitute checks must: 1) contain an image of the front and back of the original, 2) be suitable for automated processing the same as an original check, 3) have a MICR line with the information from the original check, 4) include the legend “This is a legal copy of your check. You can use it in the same way you would use the original check.” (Page 4-39)


SECTION 5 – UNIFORM COMMERICAL CODE

ARTICLES 3 AND 4


The Uniform Commercial Code

None would argue that the United States of America is a world leader when it comes to commerce. A great many factors contribute to our status as a commercial giant, but perhaps no single factor has had as large an impact on commerce in this country as the Uniform Commercial Code, more commonly referred to as the “UCC,” or simply the “Code.”

But what exactly is the UCC? It is the body of “law” which provides the rights, duties, responsibilities, and liabilities of parties to virtually every kind of commer-cial transaction. The word “law” appears in quotation marks because the UCC is not a true law in and of itself. The UCC operates more as a guideline from which each of the state legislatures has enact-ed its own laws governing commerce within its borders.

The UCC has been in formal existence since 1952. It is the product of the joint efforts of the American Legal Institute (ALI) and the National Conference of Commissioners on Uniform State Laws (NCCUSL). Since its original enactment, the UCC has undergone — and will con-tinue to undergo — many changes and revisions. Each time an article of the UCC is revised, it is up to each state to amend its own laws if it chooses to do so.

The Code is at present divided into 11 sections:

Article 1: General Provisions

Article 2: Sales

Article 2A: Leases

Article 3: Negotiable Instruments

Article 4: Bank Deposits and Collections

Article 4A: Funds Transfers

Article 5: Letters of Credit

Article 6: Bulk Transfers

Article 7: Warehouse Receipts, Bills of Lading, and Other Documents of Title

Article 8: Investment Securities

Article 9: Secured Transactions

In this section we will discuss some of the provisions included in Article 3, Negotiable Instruments and Article 4, Bank Deposits and Collections. We will attempt to cover the provisions that are most likely to have a regular impact on credit union operations. As such, this is not intended to provide an exhaus-tive review of all of Articles 3 and 4. It is intended as a tool to be used in your daily operations, to assist you in under-standing the credit union’s rights as pro-vided in the Code.

Again, the UCC is not, of itself, the law of the land. Each state and the District of Columbia have passed their own versions of the Code. Happily, most of the provisions in the various state UCCs are, indeed, identical to those we will discuss. But this guide should not be relied upon to ascertain your legal status with respect to a specific com-

Section 5 – Uniform Commerical Code Articles 3 and 4


SECTION 5 – UNIFORM COMMERICAL CODE ARTICLES 3 AND 4

mercial transaction. When problems present themselves in the area of com-mercial law, you should look to your specific state’s statute — and your credit union’s attorney — to determine your rights, duties, and responsibili-ties. That having been said, the specific references to the Code throughout this chapter and the next refer not to any particular state’s code (unless otherwise indicated), but rather to the Uniform Commercial Code as adopted by the ALI and the NCCUSL.

General Background of UCC Articles 3 and 4

The body of law that has evolved into present-day UCC Articles 3 and 4 actu-ally had its origin in the Middle Ages. Merchants, traders, and the like learned that it was indeed a dangerous world. One could simply not afford to risk trav-eling the seven seas in search of com-mercial transactions while carrying one’s gold. To solve this dilemma, these mer-chants devised a system of paying for goods with paper rather than coin.

Merchants discovered that they could sell their goods and, rather than accept-ing gold — or any other type of tangible payment — they could direct their buyer to use a written instrument pledging a payment to a third party, or “payee.” The merchant could then, as the sys-tem developed, use that instrument to satisfy some debt he owed another by transferring the ownership of the instru-ment to his creditor. That creditor could do the same until eventually the instru-ment found its way to and was paid by the original buyer. In essence, a single

instrument could be used to conduct a series of transactions without the need for cash.

Over time this written instrument came to be known as a draft. A typical draft involves three parties: “drawer,” “drawee,” and “payee.” The merchant was the drawer — he used the instru-ment to draw upon the debt owed by the buyer. The buyer, then, became the drawee. And the merchant’s creditor became the “payee” of the draft. The act of the payee signing over the draft to another creditor in the chain came to be known as “endorsement,” and the trans-action between two parties in the chain was referred to as “negotiation.”

By the beginning of the eighteenth century, a similar type of instrument was widely in use — the “note.” A note is simply a promise by one party (the “maker”) to pay another person (the “payee”). It wasn’t long before notes became negotiable in much the same fashion as drafts. Throughout the course of the 18th and 19th centuries English and American judges developed the common law relating to negotiable instruments. The courts understood that a cornerstone of the success of the commercial system was the protection of the good-faith purchasers of notes and drafts. As we will address below in our discussion of Holders in Due Course, generally speaking, a good-faith purchaser of a negotiable instrument is protected from nearly all claims and defenses which might otherwise be used to prevent him from receiving payment.

Here in the U.S., Congress began its efforts at regulating the payment system during the 19th century. During the first half of the century, state banks issued



notes that were used like money in com-merce. Human nature being what it is, there were more than occasional abuses. Some banks began issuing notes that were really not backed by sufficient cash — others made their notes redeem-able only at remote branches, secure in the knowledge that nearly no one would jump through the necessary hoops to obtain his payment. In an attempt to bring about order in what was develop-ing into a rather chaotic scene following the Civil War, Congress imposed a tax on state bank notes in order to encour-age more widespread use of the “green-backs” then issued by national banks.

This might have been disastrous for the state banks had they not managed to introduce Americans to checking accounts as a means to make pay-ments. Of course, Americans have been using checking accounts ever since, in increasingly greater volume.

A “check” is simply a draft that is drawn on a bank, thus the common law which had developed around negotiable instruments applied to most aspects of personal check transactions. The pro-cess of collecting checks evolved into a series of private agreements between banks.

As things progressed, subtle differ-ences evolved in the case law of indi-vidual states with respect to negotiable instruments law and bank collection law. By the end of the 19th century, it was clear that some uniformity had to be brought into the system so parties to interstate transactions could be rea-sonably certain of their rights, duties, and responsibilities. In 1896, the National Conference of Commissioners on Uniform State Laws sponsored the

Negotiable Instruments Law (NIL) — the predecessor to today’s UCC Article 3 — and it was eventually adopted by every state. But the NIL did not regulate check collections.

In 1913 the Federal Reserve was established. One of its purposes was to standardize the check collection sys-tem in order to improve its efficiency. Ultimately the Federal Reserve played a great role in simplifying the routing of checks by providing a more efficient clearinghouse to compete with the pri-vate banking system. But what about those banks which chose not to belong to the Federal Reserve System? Many efforts to develop a model code govern-ing check collections outside the federal system were attempted with varying lev-els of success. The most successful, the Bank Collection Code (BCC) of 1928, was adopted by only 18 states.

In 1940, the NCCUSL resolved to replace all of its various uniform acts (including the NIL) with a centralized, comprehensive commercial code. The American Legal Institute joined in the effort, and the UCC was born. Article 3, then entitled “Commercial Paper,” and Article 4, “Bank Deposits and Collections,” formed the cornerstone of the laws governing negotiable instru-ments and check collections. As men-tioned, Articles 3 and 4 were eventually adopted by every American jurisdiction.

Throughout the last half of the 20th century commerce has evolved — at times outgrowing various provisions throughout the UCC. As such, many of its articles have undergone revision through the years, including Articles 3 and 4. Others have been added — most significantly for our purposes, Article



4A in 1989, which is devoted to elec-tronic funds transfers (we will discuss Article 4A in more detail in the next sec-tion of this module). The most recent of those revisions was made in 1990, at which time Article 3 was rewritten (and given its present name, Negotiable Instruments) and Article 4 was substan-tially revised.

Article 3 of the Code is broken into six parts. Part 1 addresses general provi-sions and definitions; Part 2 deals with the concepts of negotiation, transfer, and endorsement; Part 3 is devoted to the enforcement of negotiable instru-ments; Part 4 speaks to the liability of parties to transactions involving nego-tiable instruments; Part 5 deals with the dishonor of negotiable instruments; and Part 6 addresses discharge and pay-ment (and is beyond the scope of this manual).

Article 4 contains five parts: Part 1 addresses general provisions and defini-tions; Part 2 discusses the collection of items with respect to depositary and collecting banks; Part 3 deals with col-lection of items with respect to payor banks; Part 4 addresses the relationship between payor banks and their custom-ers; and Part 5 discusses the collection of documentary drafts (which is beyond the scope of this module).

In the pages that follow, we will review details of these various parts. Again, the intent of this module is not to provide the reader with the definitive source of information regarding these two articles. Our goal is to highlight some of the more prominent aspects of various parts of these articles in terms of our daily lives managing the affairs of

credit unions.Note: Each section of the UCC,

as adopted by the NCCUSL and the ALI, was accompanied by an “Official Comment.” While these comments have not been enacted by state legislatures, judges and lawyers frequently rely on them as they attempt to resolve mat-ters under the various Code provisions. We will occasionally refer to the Official Comments (or simply “comments”) throughout this section and the next.

UCC Article 3: Negotiable InstrumentsPart 1— General provisionsScope

Article 3 applies to “negotiable instruments,” defined in §3-104 as signed writings that order or promise the payment of money (a more detailed defi-nition of “negotiable instruments” can be found below). This article does not apply to “payment orders,” which are governed by Article 4A, nor does it apply to securities transactions. Securities transactions are governed by Article 8 of the U.C.C. and are beyond the scope of this manual. The comment to §3-102 acknowledges that occasionally a par-ticular writing may fit the definition of both a “negotiable instrument” under Article 3 and an “investment security” under Article 8. In those cases, Article 8 is controlling.

A number of terms used throughout the UCC are given very specific mean-ings within the Code. Article 3 is no exception to that general premise.



§3-103 sets forth several definitions which we will briefly discuss throughout the context of this chapter. Whenever attempting to wind your way through Article 3, it is quite useful to bear in mind that most of the terms in the arti-cle have these specific meanings.

Negotiable instruments

As we’ve discussed, a negotiable instrument is a signed writing that orders or promises the payment of money. More specifically, §3-104 defines the term “negotiable instru-ment” as “an unconditional promise or

order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if all of the following apply:

• It is payable to bearer or to order at the time it is issued or first comes into possession of a holder.

• It is payable on demand or at a definite time.

• It does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money.

Refer to figure 5.1 for an illustration

Figure 5.1 The Personal Check

Figure 5.1 illustrates the UCC requirements for turning an ordinary piece of paper into a negotiable

instrument — in this case, the most common kind of negotiable instrument handled by credit unions: the

personal check. In order to create a negotiable instrument, it must be an order to pay; it must state who

is to be paid (the “payee”); it must state a sum certain; it must identify who is ordered to pay (the “payor

bank”); it must become payable on or after a specified date; it must identify the party making the order

(the “drawer”); and it must be signed by the drawer.

5-8 MODULE 1 DEPOSIT ACCOUNT REGULATIONS © DECEMBER 1999 CUNA & AFFILIATES

Figure 5.1 The Personal Check

Figure 5.1 illustrates the UCC requirements for turning an ordinary piece of paper into anegotiable instrument — in this case, the most common kind of negotiable instrumenthandled by credit unions: the personal check. In order to create a negotiable instrument, itmust be an order to pay; it must state who is to be paid (the “payee”); it must state a sumcertain; it must identify who is ordered to pay (the “payor bank”); it must become payableon or after a specified date; it must identify the party making the order (the “drawer”); andit must be signed by the drawer.

Negotiable instruments — also referred to in the Code simply as “instruments”— are divided into two primary categories: drafts and notes. A draft is aninstrument that is an order to pay (for example, a check or share draft drawn on acredit union), while a note is an instrument that is a promise to pay (such as atypical installment loan). Because the primary emphasis in this manual is the lawwith respect to the deposit side of credit union operations, our review of Article 3will focus on its application to drafts as opposed to notes.

The comment to revised Article 3 makes clear that a credit union share draftfalls within the meaning of the word “check” — thus credit union share drafts maybe referred to as “checks” for purposes of the UCC. In fact, Article 3 includes creditunions within the definition of the term “bank.” Although there are importantdistinctions between credit unions and banks, it is quite useful to treat them assynonymous terms under the Code, to help ensure a uniform operation of thenation’s checking account system.

To whom is an instrument payable?The payee of an instrument is the person to whom an instrument is payable.

Typically, a cursory review of a check will reveal the party to whom it is payable.

Level Two

John Doe

Jane A. Doe1234 1st StreetThe City, MI 98765

Pay to the Order of(Order to Pay)

Credit Union (Payor Bank)AddressCity, State Zip Code

Memo

(Payee's Name)

(Sum Certain Alpha)

(Drawer's Signature)

Dollars

$

Date1252

Sum Certain Numeric



of the most common type of negotiable instrument, the personal check.

Negotiable instruments — also referred to in the Code simply as “instru-ments” — are divided into two primary categories: drafts and notes. A draft is an instrument that is an order to pay (for example, a check or share draft drawn on a credit union), while a note is an instrument that is a promise to pay (such as a typical installment loan). Because the primary emphasis in this manual is the law with respect to the deposit side of credit union operations, our review of Article 3 will focus on its application to drafts as opposed to notes.

The comment to revised Article 3 makes clear that a credit union share draft falls within the meaning of the word “check” — thus credit union share drafts may be referred to as “checks” for purposes of the UCC. In fact, Article 3 includes credit unions within the defini-tion of the term “bank.” Although there are important distinctions between cred-it unions and banks, it is quite useful to treat them as synonymous terms under the Code, to help ensure a uniform oper-ation of the nation’s checking account system.

To whom is an instrument payable?

The payee of an instrument is the per-son to whom an instrument is payable. Typically, a cursory review of a check will reveal the party to whom it is pay-able. But occasionally that is not readily apparent. §3-110 addresses a number of different scenarios to assist the credit union in determining who is entitled to the payment of an instrument.

First and foremost, this section makes clear that the person to whom an instru-

ment is initially payable is determined by the intent of the person signing as the issuer of the instrument (for example, the “drawer”). In the rare instance that more than one person signs as a drawer, and not all of the signers intend the same person as payee, the instrument is payable to any person intended by one or more of the signers.

Occasionally, the individual to whom an instrument is payable will not be identified by name. This is not nec-essarily fatal to the issue of whether the instrument is negotiable. §3-110 provides that the payee can be identi-fied “in any way, including by name, identifying number, office, or account number.” §3-110(c). If the instrument is payable to an account identified by number and to a named person, the named person is entitled to payment even if he is not the owner of the identi-fied account. §3-110(c)(1).

Section 3-110 addresses other fairly rare situations as well. It makes clear that if an instrument is payable to a trust, an estate, or a person described as the trustee or representative of a trust or estate, the instrument is payable to either the trustee, the representative, or a successor of either, regardless whether a beneficiary or estate is also named in the instrument. §3-110(c)(2)(i). Further, it provides that if an instrument is pay-able to a person described as the agent or representative of another named person, the instrument is payable to the agent/representative, his successor, or directly to the represented person. (§3-110(c)(2)(ii))

The same section provides that if an instrument is payable to a person described as holding an office, the



instrument is payable to the named per-son, the incumbent of the office, or a successor to the incumbent. (§3-110(c)(2)(iii))

Multiple payees

The 1990 revision to Article 3 clari-fied an ambiguity in the law with respect to multiple payees. A check payable to “John Doe or Jane Doe” can be paid to either John or Jane Doe. If a check is payable to “John Doe and Jane Doe,” neither John nor Jane Doe can receive payment without the signature of the other. Those provisions are not new. But Revised Article 3 addressed for the first time the situation where the words “and” or “or” do not appear. If, for example, a check is payable to “John Doe, Jane Doe,” Revised Article 3 pro-vides that it is payable to either John or Jane Doe. §3-110(d).

At least one court has even held that the use of a forward slash between names on a check made that check payable to either party. In that case, three checks payable to “San Fran Plumbing, Inc./Danco, Inc.” were cashed by a bank even though the endorsements of Danco, Inc., (unbe-knownst to the bank, of course) were forged. A New Jersey court held that the checks were properly payable to either party in the alternative — since San Fran Plumbing, Inc., did, in fact, negoti-ate them, that negotiation was proper. In the words of the court: “The short, slanting stroke is called a ‘virgule,’ and in modern usage is equivalent to the word ‘or.’ Further, an ambiguous co-payee designation should be considered to be in the alternative.” Danco Inc. v. Commerce Bank/Shore, N.A., 29 UCC

Rep Serv 2d 513, 290 NJ Super 211, 675 A2d 663.

Essentially, the Code has placed the burden of clearly expressing the inten-tion that a check be negotiated by all of the named payees on the person issuing the instrument. As a practical matter, many credit unions routinely require that all named parties in such cases endorse the instrument. Although this is not a requirement under the Code, such a poli-cy could help the credit union avoid find-ing itself in the middle of a feud between John and Jane Doe at a later time.

Conflicting amounts — which one controls?

A typical check presented at the credit union for deposit will include the words “Pay to the order of...” along with an individual’s or organization’s name or account number, followed by a numeric expression of the amount of payment. The check will also then spell out the amount of the payment using words (for example, “Ten Thousand Dollars and No Cents”). Suppose a check contains an inconsistency between the numeric amount and the spelled-out amount? Section 3-114 provides that in such a case words prevail over numbers. Thus a check payable to the order of John Doe orders the payment of “$1,000” (numeric) and “Ten Thousand Dollars” (spelled-out), it is properly payable in the amount of ten thousand dollars.

Statute of limitations

Prior to Revised Article 3, the issue of when the statute of limitations expired in an action to enforce an instrument was less than clear. Under the 1990



revision, a party entitled to payment of a personal check must now bring a law-suit to enforce the payment within three years after the check has been dishon-ored or 10 years from the date the check was issued, whichever occurs earlier.

Part 2 — Negotiation, transfer, and endorsementNegotiation

“Negotiation” of an instrument means a transfer of possession of the instrument, by a person other than the issuer, to another person. The person to whom this transfer is made is known as the “holder” of the instrument. Except for a transfer made by a remitter of a cashier’s check or teller’s check — for example, the person who purchases one of those instruments but makes it pay-able to another party — if an instrument is payable to an identified person, it can-not be negotiated without the transfer of possession and the endorsement by the holder. An instrument that is payable to bearer (for example, an instrument that does not name a payee, but is rather payable to anyone who has possession of it) can be negotiated simply by transfer of possession. §3-201.

Transfer

Unless two parties have otherwise agreed, if an instrument is transferred from one party to another for value, but the transferor neglects to endorse the instru-ment, the person to whom the instrument was transferred has the right to force the transferor to supply his endorsement. §3-203. However, in such a case, negotia-tion does not take place unless and until the endorsement is made.

Endorsement

“Endorsement” generally means a signature (other than the signature of the maker, drawer, or acceptor) on an instrument for the purpose of negoti-ating it or restricting payment of the instrument. The Code provides for differ-ent types of endorsements. An endorse-ment is a “special endorsement” if it includes the signature of a holder and identifies a person to whom the instru-ment will then be made payable. For example, if a check is payable to John Doe, and he endorses it “Pay to the order of Jane Doe” and signs his name, John Doe has made a “special endorse-ment.” The check is then payable only to Jane Doe (who, in turn, can add her own special endorsement). §3-205(a).

If the holder simply signs his name with no other instructions or wording, the endorsement is known as a “blank endorsement.” A check endorsed in blank becomes payable to anyone who later comes into its possession unless and until someone adds a special endorsement. §3-205(b).

An endorsement which purports to limit payment of an instrument to a particular person is generally not effec-tive in stopping further transfers. For example, if a check is endorsed “Pay Jane Doe Only,” Jane Doe may negoti-ate the check to subsequent holders who may then disregard the restriction. §3-206(a).

Another type of restrictive endorse-ment, which is a frequent cause for concern, involves a payee endorsing a check “Pay to the order of Jane Doe, in trust for Jim Doe.” Suppose in a case like this that Jane then endorses the check in blank, and delivers it to another



individual, a depositary bank, or the bank on which it was drawn, for pay-ment. The Code makes clear that, unless any of these parties has notice that Jane has breached any fiduciary duty owed to Jim, they can safely pay Jane. If any party has notice that Jane is using the funds for her own personal benefit, that party could be liable to Jim if they pay the check to Jane. §3-206(d).

Part 3 — Enforcement of instrumentsThe “Holder in Due Course” doctrine

Generally speaking, any holder of an instrument is entitled to its enforce-ment. There are, however, several defenses to the payment of an instrument which can be raised by the obligor (the person obligated to make the payment). Consider, for example, the case of the sale of goods between two parties — call them Smith and Jones — where Smith has agreed to purchase goods from Jones and Jones has agreed to accept payment by personal check. In this example, with respect to the personal check, Smith is the obligor and Jones is the obligee. Let’s suppose further that Jones never delivers the goods. His failure to deliver the goods provides a defense to Smith, and he can stop payment on the check without incurring liability to Jones (stop-payment orders are addressed below in our discussion of Article 4).

But what if, prior to Smith’s realiza-tion that the goods would not be deliv-ered, Jones negotiated the check to Wilson? Will Smith be entitled to raise the same defense against Wilson as he could against Jones? The short answer is: It depends.

Whether Smith can raise a defense to payment of the personal check against Wilson depends on both (a) the type of defense he seeks to raise; and (b) whether or not Wilson is a “Holder in Due Course.”

A “Holder in Due Course” (we’ll refer to it as an HIDC) has special rights to enforce an instrument. To put it another way, HIDC-status limits the types of defenses to payment that can be raised. A holder of an instrument becomes an HIDC if and only if 1) at the time the instrument is issued or negotiated to the holder it does not bear “such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity” (§3-302(a)(1)); and 2) the holder took the instrument:

• For value.

• In good faith.

• Without notice that the instrument was overdue or had been dishonored or there was an incurred default with respect to payment of another instru-ment issued as part of the same series.

• Without notice that the instrument contained an unauthorized signature or had been altered.

• Without notice of any claim to a prop-erty right or possessory right in the instrument §3-302(b).

At the risk of oversimplification, think of a Holder in Due Course as an inno-cent, impartial bystander to the primary obligation between two parties — a good-faith purchaser with special powers.

The types of defenses that can be raised by an obligor are divided into two



important categories: “real defenses,” and all others (sometimes referred to as “personal defenses”). An obligor has a “real defense” to the payment of an instrument based on any of the following:

• Infancy of the obligor, to the extent the age of the obligor is a defense to a simple contract (in most states, a minor can void a contract until he reaches the age of majority — typically age 18).

• Duress, lack of legal capacity, or ille-gality of the transaction which under other law nullifies the obligation of the obligor (for example, if a contract was signed at gun point, it would probably be considered to have been signed under duress; if the obligor was men-tally incompetent, his contract is void; or if a person’s debt arises from an illegal gambling transaction, it is not enforceable).

• Fraud that induced the obligor to sign the instrument without knowing what the instrument was.

• Discharge of the obligor in insolvency proceedings (typically bankruptcy).

These “real defenses” are set forth in §3-305(a)(1). Several other defenses to payment — the so-called “personal defenses” — can typically be raised by obligors, including:

• Nonissuance of the instrument, con-ditional issuance, and issuance for a special purpose.

• Failure to countersign a traveler’s check.

• Modification of the obligation by a separate agreement.

• Payment that violates a restrictive endorsement.

• Instruments issued without consider-ation or for which promised performance has not been given.

• Breach of warranty when a draft is accepted.

• Misrepresentation.

• Mistake in the issuance of the instrument.

This distinction between “real defens-es” and all others is important because “real defenses” are effective against all holders — even HIDCs. However “per-sonal” defenses are not effective against an HIDC. §3-305(c). The essence of the HIDC doctrine is essentially that an hon-est third party who takes a negotiable instrument for value generally should not be made to suffer the same defenses as the party who negotiated the instrument to him. The doctrine separates the obli-gation to pay money from the underlying transaction which gave rise to that obli-gation. If two parties, A and B, have a falling out, the law regards it as unfair to drag third party C into the middle of it.

Returning to our example, if Wilson took the check from Jones: for value; in good faith; without notice that the instrument was overdue or had been dishonored or that there was an incurred default with respect to payment of another instrument issued as part of the same series; without notice that the instrument contained an unauthor-ized signature or had been altered; and without notice of any claim to a property right or possessory right in the instru-ment, then — assuming the check



wasn’t an obvious forgery — Wilson is an HIDC, and Smith’s defense to payment is ineffective against Wilson because it does not fit within the category of “real” defenses. Smith, of course, still can recover against Jones for Jones’ breach of contract.

Enforcement of lost, destroyed, or stolen instruments

Occasionally an instrument will be lost, destroyed, or stolen. In such a case, is the individual who was entitled to pay-ment on the instrument simply out of luck? Perhaps not. Section 3-309 pro-vides that the payee (or other holder, as the case may be) is entitled to enforce a lost, destroyed, or stolen instrument if:

• He was in possession of the instrument and entitled to enforce it immediately before it was lost, destroyed, or stolen.

• The loss of possession was not the result of a transfer by the individual or a lawful seizure.

• The person cannot reasonably obtain possession of the instrument because it was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found.

It should be noted — and should come as no surprise — that an indi-vidual attempting to enforce a lost, destroyed, or stolen instrument will have to jump through some substantial hoops in order to obtain payment. He must file a lawsuit in order to enforce the instrument. In that lawsuit, he must prove both the terms of the instrument and his right to enforce the instrument.

The Comment to §3-309 provides that a judgment to enforce the instrument can-not be given unless the court finds that the defendant (for example, the issuer) will be “adequately protected” against a claim to the instrument by a holder who might show up at a later date. The court is given discretion in determining how adequate protection is to be assured. It can — and usually does — take the form of an expensive bond for the amount of the check. Some courts have made those “hoops” even more difficult by raising the burden of proof. Typically in civil litigation, the burden of proof on a plaintiff is by a preponderance of the evidence — for example, the facts show that it is more likely than not that a given allegation is true. But at least one court — in Minnesota — required that a claimant under §3-309 prove its case by “clear and convincing evidence” — a standard that is higher than the prepon-derance-of-the-evidence standard. See NAB Asset Venture II, L.P. v. Lenertz, Inc., 36 UCC Rep Serv 29474 (Minn App 1988).

Lost, destroyed, or stolen cashier’s check, teller’s check or certified check

The Code provides a special proce-dure in the case of lost or destroyed cashier’s checks, teller’s checks, or certified checks, set forth in §3-312. All three are defined in Article 3 as follows:

• A “cashier’s check” is a draft with respect to which the drawer and draw-ee are the same bank or branches of the same bank. §3-104(g).

• A “teller’s check” is a draft drawn by a bank on another bank or payable at or through a bank. §3-104(h).



Figure 5.2 Cashier’s and Teller’s Checks

Cashier’s Check

Teller’s Check

Figure 5.2 shows examples of a cashier’s check and a teller’s check. These negotiable instruments are

similar in most respects. A cashier’s check is a check that a bank draws on itself. A teller’s check is a

check that a bank draws on another bank. Note the “payable through” notation on the teller’s check.

Keep in mind, for purposes of the UCC, credit unions are “banks.”


The Cashier’s Check

The Teller’s Check

Figure 5.2 shows examples of a cashier’s check and a teller’s check. These negotiableinstruments are similar in most respects. A cashier’s check is a check that a bank draws onitself. A teller’s check is a check that a bank draws on another bank. Note the “payablethrough” notation on the teller’s check. Keep in mind, for purposes of the UCC, creditunions are “banks.”


Level Two

NEW BANKThe City, MI 98765


Remitter

(Payee's Name)

PAY EXACTLY $1,000 DOL 00 CTS

VOID AFTER 90 DAYS

Dollars

$

Date

4900892027

*1,000.00*

THIS DOCUMENT HAS AN ARTIFICIAL WATERMARK PRINTED ON THE BACK. THE FRONT OF THE DOCUMENT HAS A MICRO-PRINT SIGNATURE LINE. ABSENCE OF THESE FEATURES WILL INDICATE A COPY.

AUTHORIZED SIGNATURE

CASHIER'S' CHECK



Remitter

(Payee's Name)


VOID AFTER 90 DAYS

Dollars

$

Date

4900892027

*1,000.00*



TELLER'S CHECK

PAYABLE THRUCredit Union (Payor Bank)


The Cashier’s Check

The Teller’s Check

Figure 5.2 shows examples of a cashier’s check and a teller’s check. These negotiableinstruments are similar in most respects. A cashier’s check is a check that a bank draws onitself. A teller’s check is a check that a bank draws on another bank. Note the “payablethrough” notation on the teller’s check. Keep in mind, for purposes of the UCC, creditunions are “banks.”


Level Two



Remitter

(Payee's Name)


VOID AFTER 90 DAYS

Dollars

$

Date

4900892027

*1,000.00*



CASHIER'S' CHECK



Remitter

(Payee's Name)


VOID AFTER 90 DAYS

Dollars

$

Date

4900892027

*1,000.00*



TELLER'S CHECK

PAYABLE THRUCredit Union (Payor Bank)

PAYABLE THROUGH NEW CREDIT UNIONAnywhere, WI 12345

• A “certified check” is a check accept-ed by the bank on which it is drawn (“acceptance” means the drawee bank’s signed agreement to pay the check as presented). §3-409(d).

Note: For an illustration of a cashier’s check and a teller’s check, see figure 5.2.

These types of checks are distin-guished from other types of drafts in that the drawee bank itself is responsible for



the payment of the item. In the case of a personal check, for instance, it is the drawer who has primary responsibility for its payment. Although a personal check is payable by the drawer’s bank, if the drawer does not have sufficient funds in his account at the bank to pay the instrument, his bank is under no duty to honor it. In the case of cashier’s checks, teller’s checks, and certified checks, the payable amount is a direct obligation of the bank that issues the instrument.

Because of the special nature of these types of instruments, the Code (in §3-312) provides a special procedure by which a person who loses one can get a refund of the amount of the check, with-in a reasonable period of time, and with-out the need for a court order — while at the same time providing built-in pro-tection for the issuing bank. Under this special procedure, the individual who claims the right to receive the amount of a cashier’s check, teller’s check, or certified check that was lost, destroyed, or stolen (known as the “claimant”) may provide to the issuing bank a claim to the amount of the check. The claim must include a “declaration of loss” — a written statement made under the pen-alty of perjury — which states that:

• Declarer lost possession of a check.

• Declarer is the drawer or payee (for certified checks) or the remitter or payee (for cashier’s checks and teller’s checks) of the check.

• Loss of possession was not the result of a transfer by the declarer or a lawful seizure.

• Declarer cannot reasonably obtain pos-session of the check because it was

destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.

The claim must describe the check with reasonable certainty, it must be received by the obligated bank in time for it to act on it before the check has been paid, and the claimant must provide reasonable identification if requested by the obligated bank. Refer to figures 5.3 and 5.4 for sample Declaration of Loss statements.

If all of these conditions are met, the claim becomes enforceable on the 90th day following the date of the check (for cashier’s checks and teller’s checks) or the date the check was certified (for certified checks). In the rare case where a claim is made after 90 days have elapsed, it is immediately enforceable.

Until the claim becomes enforceable, it has no legal effect — the bank may pay the original check to a person enti-tled to enforce payment who presents the item for payment without regard to the claim during the period in which the claim is not enforceable. If the check is not presented before the claim becomes enforceable, the bank is then under no duty to pay the check and must then pay the claim. If the check is presented by a Holder in Due Course(HIDC) after the bank has refunded the money to the claimant, the bank does have the option of paying the HIDC the amount of the item, at which point the claimant must then refund the payment to the obligat-ed bank. Note, however, that your credit union would be wise not to pay an HIDC in such a situation, as it is under no legal duty to do so. If the bank refuses to



pay the HIDC who presents a cashier’s check, teller’s check, or certified check after a claim has been filed and paid, the claimant (who is now holding the money) is under a legal obligation to pay the amount of the check to the HIDC.

Limitations of special section. It is important to note that only the drawer or payee of a certified check or the remittor or payee of a cashier’s check or teller’s check is entitled to make a claim under §3-312. As the comment makes clear, an endorsee of a check is not covered by this section because the endorsee is not an original party to the check, nor is she a remittor. Limitation of this spe-cial section to claims made by original parties or remittors gives the obligated credit union the ability to determine the identity of the persons who could assert a claim with respect to the check — the credit union is not put into the posi-tion of having to determine the rights of some third party with whom the credit union had not dealt, and would have no way of ascertaining. If a cashier’s check is purchased to the order of the person purchasing it, and that person later indorses it over to a third person who then loses the check, the third person may assert rights to enforce the check under the more cumbersome — and expensive — process of filing a lawsuit to enforce a lost or stolen instrument, as discussed above with respect to §3-309.

From a practical standpoint, it is important to remind tellers not to cash teller’s and cashier’s checks drawn on their credit unions if they are more than 90 days old. When a member submits a Declaration of Loss, it becomes a valid claim against the credit union on the 90th day as discussed. If after paying

such a claim a Holder in Due Course presents the original instrument for pay-ment (for example, more than 90 days after it was issued) and the teller cashes it, the credit union could well be out the money.

Wrongful refusal to honor a cashier’s check, teller’s check, or certified check

§3-411 provides potentially severe penalties for a credit union that wrong-fully refuses to pay a cashier’s check, teller’s check, or certified check. If a credit union wrongfully refuses to honor one of these instruments, the person claiming the right to payment is entitled to compensation for expenses and loss of interest resulting from the nonpay-ment. Further, if the person entitled to payment provides notice to the obligated credit union that he may incur additional damages, the obligated credit union may be required to pay those additional (known as “consequential”) damages as well. Those consequential damages could include reasonable attorney fees and court costs associated with the col-lection of the item. The important moral to this story: credit unions should not lightly place stop payments on their cashier’s checks, teller’s checks, and certified checks.

Accord and satisfaction by use of instrument

Under common law, if a debtor had a good-faith dispute with a creditor about the amount owed on a debt, he could offer to settle the debt for less than the amount the creditor believed was owed by presenting the creditor with a check marked “payment in full” (or words to a



Figure 5.3 Sample Declaration of Loss of Certified Check

DECLARATION OF LOSS OF CERTIFIED CHECK

Date: _______________

Claimant’s Name: ___________________________________________________________________

Claimant’s Address ___________________________________________________________________

___________________________________________________________________

Certified Check No. _______________

Date Date check of check: _______________ certified:_______________

Amount of check: _______________

Payable to ___________________________

Drawer’s Name ___________________________

Under penalty of perjury, I hereby swear:

1. That I lost possession of the above referenced check.

2. That I am the (circle one) drawer / payee of the above referenced check.

3. That the loss of possession of the above referenced check was not the result of a transfer by me or a lawful seizure.

4. That I cannot reasonably obtain possession of the check because (check one):

____ it was destroyed.

____ its whereabouts cannot be determined.

____ it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.

_____________________________

Signature of Claimant

Figure 5.3 is an example of a “Declaration of Loss” which should be used when a member loses a certi-

fied check. Once completed, this claim is enforceable on the ninetieth day following the date the check

was certified by the credit union. If ninety days have already elapsed when the claim is submitted, the

claim is immediately enforceable. Note: only drawers and original payees may submit this type of claim.



Figure 5.4 Sample Declaration of Loss of Cashier’s or Teller’s Check

DECLARATION OF LOSS OF CASHIER’S OR TELLER’S CHECK

Date: _______________

Claimant’s Name: ___________________________________________________________________

Claimant’s Address ___________________________________________________________________

___________________________________________________________________

Certified Check No. ____________________________

Date of check: ____________________________

Amount of check: ____________________________

Payable to _________________________________________

Remitter’s Name _________________________________________

Under penalty of perjury, I hereby swear:

1. That I lost possession of the above referenced check.

2. That I am the (circle one) remittor / payee of the above referenced check.

3. That the loss of possession of the above referenced check was not the result of a transfer by me or a lawful seizure.

4. That I cannot reasonably obtain possession of the check because (check one):

____ it was destroyed.

____ its whereabouts cannot be determined.

____ it is in the wrongful possession of an unknown person or a person that cannot be found or is not ame-nable to service of process.

_____________________________

Signature of Claimant

Figure 5.4 is an example of a “Declaration of Loss,” which should be used when a member loses a

cashier’s or teller’s check. Once completed, this claim is enforceable on the ninetieth day following the

date on the check. If ninety days have already elapsed when the claim is submitted, the claim is immedi-

ately enforceable. Note: only remittors and original payees may submit this type of claim.



similar effect). If the creditor accepted the check, it had in effect agreed to accept the lesser amount as payment in full. This doctrine was and is known as “accord and satisfaction,” and it is codi-fied in Article 3. Under this doctrine, a creditor can always send the check back to the debtor if it is not satisfied with the proposed settlement.

Through the years, some courts allowed creditors a way around a debt-or’s attempt at accord and satisfaction by using words such as “without preju-dice” or “with reservation of rights” in their endorsements. §3-311 of Revised Article 3 makes clear that creditors may not subvert an attempt at accord and satisfaction using such tactics. Acceptance of a check presented as pay-ment in full of an obligation, regardless of how the creditor endorses the instru-ment, serves as the creditor’s accep-tance of the debtor’s offer.

There are a few very important points to bear in mind on this score, however. In order to settle a debt through accord and satisfaction, a debtor must in good faith raise a bona fide dispute to the amount owed. Suppose, for example an insurance company sends a check to an insured as settlement for a claim for personal injury in an accident which is clearly covered by the insurance policy. Suppose the check is only a fraction of the full amount of the insured’s cover-age, but he is in need of the funds, so he cashes the check. If a court determines that the insurance company was tak-ing unfair advantage of the insured, the insured’s cashing of the check would not result in an accord and satisfaction, because the insurance company was not acting in good faith.

Also, given advances in technol-ogy with regard to the check collection system, the Code recognizes that many types of businesses routinely handle hundreds or thousands of payments from customers. In most cases, payments are processed through an automated process which cannot detect any special “payment in full” language on a check. §3-311 allows creditors to notify debtors that any payments sent with “paid in full” notations must be sent to a specific address, to allow the creditor to manu-ally process them. Alternatively, a credi-tor which has inadvertently accepted a payment in accord and satisfaction can send the payment back to the debtor within 90 days of its acceptance and thereby “undo” the accord and satisfac-tion. §3-311(c).

Part 4 — Liability of partiesSignature

Generally speaking, an individual is not liable on an instrument unless her signature appears on the instrument, or if she is represented by an agent or rep-resentative who signed the instrument on her behalf. §3-401 and §3-402. In the latter case, the agent or representa-tive is generally not liable on the instru-ment if that signature unambiguously shows that it is made on behalf of the represented person. §3-402(b)(1). So, for example, if a credit union treasurer signs credit union checks “Jane Doe, Treasurer, XYZ Credit Union,” XYZ credit union is liable on the instrument, not Jane Doe (a provision which should pro-vide credit union treasurers and manag-ers some measure of comfort).



Impostors, fictitious payees, forgeries and the like ...

Forgeries, alterations of instruments, impostors, and the like present difficult problems in negotiable instruments law and as such have been the subject of a great deal of litigation. These situations tend to create a loss which some inno-cent party will likely be required to bear, unless, of course, the “bad guy” can be apprehended. Since nobody yearns to bear the loss when they’ve not contrib-uted to its cause, these matters tend to frequently wind up in courts. Both Articles 3 and 4 attempt to fairly resolve disputes which can arise between various parties to a negotiable instrument which becomes part of a scheme to defraud.

As we will discuss in further detail below, Article 4 generally prohibits a credit union from paying an item that is not “properly payable.” By definition, an item which includes a forged signature or an unauthorized alteration is not properly payable. Hence, credit unions and other financial institutions bear a great deal of the risk of loss involved in these types of bogus instruments. This is not to say that credit unions and banks must always be left holding the bag. Financial institutions do have rights in these situations. The extent of those rights depends on the spe-cific nature of the forgery or alteration.

Take, for instance, the case of a drawer forgery. Typically this would arise when a credit union member’s checkbook was lost or stolen, and an individual forged the member’s name on a check as its drawer. If the member notifies the credit union in time for it to withhold payment of the forged item (or items) the credit union must, of course, not pay the items. But what if the items

are paid before the member realizes his checks were missing? As we will discuss further below, Article 4 provides the member a relatively short window — as little as 30 days, in some cases — after he receives the statement on which the stolen checks appear to notify the credit union that it has paid an item that was not properly payable. As long as the member contacts the credit union within that time frame, the credit union bears the loss for the item (under Article 4, it may be possible for the credit union to shift that loss to another financial institution or other innocent party who presented the item — we will discuss the time frames within which the credit union can accomplish this in our discus-sion of Article 4).

Article 3 creates a different outcome in the case of endorsement forgeries. Each party who endorses an instrument makes under §3-416 and §3-417 cer-tain warranties (known as “transfer war-ranties” and “presentment warranties”). Among those is a warranty that there are no unauthorized or missing endorse-ments on the instruments. If it later turns out that there was, indeed, a fraud-ulent endorsement, then the endorser who presented the item to the drawee bank for payment has breached this war-ranty and the drawee bank is entitled to return the item to — and be reimbursed by — that party. Each endorser on an instrument makes the same warranties; thus in the typical forged endorsement case, each succeeding endorsee can send the check back down the line, recovering on the warranties made by prior endorsers, until ultimately the check winds up in the hands of the indi-vidual who dealt directly with the forger.



Any breach of warranty claim must be asserted generally within 30 days after the drawee learns of the breach and the identity of the person who negotiated the item. §3-417.

The “Impostor Rule.” In certain situ-ations, the accountholder must bear the loss for a fraudulent endorsement. The first of these is what is referred to as the “Impostor Rule.” Suppose an individual (call him Mr. X) poses as the agent of another person, Mr. Y. Suppose further that the drawer writes a check, makes it payable to Mr. Y, but turns it over to Mr. X. Then suppose Mr. X signs Mr. Y’s name and deposits the item into the banking system. In this scenario, the drawer cannot later assert that the item was not properly payable and, therefore, he is on the hook. §3-404(a).

The fictitious payee. The second situ-ation in which the accountholder must bear the loss for a fraudulent endorse-ment involves a “fictitious payee.” Here the drawer or one of his agents or employees prepares a check pay-able to a named payee, but he does not intend that the payee will ever receive the check. Suppose, for example, Mr. A, who is an employee of Mr. B, prepares a check drawn on Mr. B’s company account, payable to Mr. C. But instead of forwarding the check on to Mr. C, Mr. A forges Mr. C’s endorsement and cash-es it. Here Mr. B must bear the loss on this item unless, of course, he can find and collect from Mr. A. §3-405.

In general, if a bank in good faith pays an instrument based on the fraudu-lent endorsement of an employee of the drawer who has been entrusted with “responsibility” with respect to any instrument, the endorsement is effec-

tive as the endorsement of the person to whom the instrument is payable if it is made in the name of that person. Of course, if the bank which pays the instrument fails to exercise ordinary care in paying the item, and that failure substantially contributes to loss result-ing from the fraud, the person bearing the loss (in our case, Mr. B) can recover from the bank. §3-405(b).

The Code provides a very specific meaning to the term “responsibility” as used above. “Responsibility” with respect to an instrument means authority to:

• Sign or endorse instruments on behalf of the employer.

• Process instruments received by the employer for bookkeeping purposes, for deposit to an account, or for other disposition.

• Prepare or process instruments for issue in the name of the employer.

• Supply information determining the names or addresses of payees of instruments to be issued in the name of the employer.

• Control the disposition of instru-ments to be issued in the name of the employer.

• Act otherwise with respect to instru-ments in a responsible capacity. §3-404(a)(3).

Note: an employee does not have “responsibility” with respect to an instrument merely because he has access to it.

Negligence contributing to forged signature or alteration of instrument. A drawer can also find himself holding



the bag on an alteration if his own neg-ligence contributes to an alteration of an instrument that is later paid in good faith by his drawee bank. Consider the following example, which appears in the Comment to §3-406:

Example: A company writes a check for $10. The figure “10” and the word “ten” are typewritten in the appropri-ate spaces on the check form. A large blank space is left after both the figure and the word. The payee of the check, using a typewriter with a typeface simi-lar to that used on the check, writes the word “thousand” after the word “ten” and a comma and three zeros after the figure “10.” The drawee bank then in good faith pays $10,000 when the check is presented for payment and debits the account of the drawer in that amount.

As was discussed earlier, a bank is generally under a duty not to pay items unless they are properly payable. An item is, by definition, not properly pay-able if it is altered in an unauthorized fashion. The Code, however, provides an exception to this general proposition in situations such as these. If a court finds that the drawer failed to exercise ordinary care in writing the check and that the failure substantially contrib-uted to the alteration, the drawer may not claim that the bank paid an item that was not properly payable due to the alteration. In other words, if the drawer makes it too easy for the bad guys, the drawer may have to pay the price for his negligence.

Part 5 — DishonorPresentment, dishonor, and notice of dishonor

“Presentment” is defined in §3-501 to mean generally, with respect to a check, a demand that the drawee or other party obliged to pay an instrument make payment on it. Section 3-501(b)(1) provides a broad variety of present-ment options, including physical pre-sentment of the item at the credit union upon which it is drawn, or presentment “by any commercially reasonable means, including an oral, written, or electronic communication.” This helps speed the check collection process substantially, given advances in technology, as we will discuss below when covering Article 4.

Section 3-501 also allows a party to whom presentment is made to treat it as occurring on the next business day after the day of presentment if the party to whom presentment is made estab-lishes a cutoff hour not earlier than 2 p.m., and the presentment is made after the cutoff hour. As is addressed in more detail in our discussion of Article 4, this cutoff hour can have an impor-tant impact on a credit union’s ability to make timely returns of nonsufficient funds items.

Several rules govern the dishonor of checks. If a check is duly presented for payment to the payor credit union (except in the case of presentment for payment over the counter), the check is considered dishonored if the payor credit union makes a timely return of the check or sends timely notice of dishonor or nonpayment as required in Article 4. §3-502(b)(1). A draft is also considered dishonored if it is presented over the



counter for payment or for certification (“acceptance”), and the payor credit union refuses to pay it or certify it by the close of business on the date of present-ment. §3-502(b)(2).

If a check has been dishonored, Article 3 provides that an endorser of a check is liable to any subsequent transferees for payment of the check. §3-415. In addi-tion, §3-414 states that the drawer is obliged to pay an unaccepted draft if it is dishonored. These obligations, however, may not be enforced unless the endorser and drawer are given notice of dishonor of the instrument (unless notice is excused, as discussed below). §3-503(a). Notice of dishonor may be given by any com-mercially reasonable means — typically it is accomplished by returning the instru-ment to a credit union or bank for collec-tion. §3-503(b). Finally, if an instrument is taken for collection by a collecting bank, notice of dishonor must be given (a) by the bank before midnight of the next banking day following the banking day on which the bank received notice of dishonor; or (b) by any other person with-in 30 days following the day on which the person receives notice of dishonor. §3-503(c).

Excused notice of dishonor

As discussed above unless notice is excused, endorsers and drawers will be liable to pay an instrument if it is dishon-ored. Section 3-504 provides that notice of dishonor is excused if, by the terms of the instrument, no notice of dishonor is necessary to enforce the instrument or if the party whose obligation is being enforced waived notice of dishonor. This section also provides that any delay in giving notice of dishonor is excused if

the delay was caused by circumstances beyond the control of the person giv-ing the notice as long as that person exercised reasonable diligence after the cause of the delay ceased to operate.

UCC Article 4: Bank Deposits and Collections

To this point, we have been discuss-ing the law of negotiable instruments in general. As was briefly mentioned, the term “negotiable instrument” encom-passes a variety of items. For purposes of this manual, our concerns lie primar-ily with checks. So it is with all of the participants in what can be broadly referred to as the “banking system.” Article 4 of the UCC was drafted to bring uniformity to the laws of check collec-tion as they pertain specifically to the banking system.

Perhaps the Comment to §4-401 puts matters into the best perspective as fol-lows:

The great number of checks handled by banks and the countrywide nature of the bank collection process require uniformity in the law of bank collections. There is needed a uniform statement of the principal rules of the bank collection process with ample provision for flexibility to meet the needs of the large volume handled and the changing needs and conditions that are bound to come with the years. This Article meets that need.

In 1950, at the time Article 4 was drafted, 6.7 billion checks were written annually. By the time of the 1990 revision of Article 4, annual volume was estimated by the American Bankers Association to be about 50 billion checks. The banking system could not have coped with this increase in check



volume had it not developed in the late 1950s and early 1960s an automated sys-tem for check collection based on encoding checks with machine-readable information by Magnetic Ink Character Recognition (MICR). An important goal of the 1990 revision of Article 4 is to promote the efficiency of the check collection process by making the provi-sions of Article 4 more compatible with the needs of an automated system and, by doing so, increase the speed and lower the cost of check collection for those who write and receive checks. An additional goal of the 1990 revision of Article 4 is to remove any statutory barriers in the article to the ultimate adop-tion of programs allowing the presentment of checks to payor banks by electronic transmis-sion of information captured from the MICR line on the checks. The potential of these programs for saving the time and expense of transporting the huge volume of checks from depositary to payor banks is evident.

Uniform Commercial Code CommentSection 4-101

So, while Article 3 defines the rights between parties with respect to nego-tiable instruments in general, Article 4 is devoted to that rather large subset of transactions within the body of nego-tiable instruments — bank collection of checks. Simply put, Article 4 defines the rights between parties with respect to bank deposits and collections.

Consider Article 3 the appetizer, if you will, and Article 4 the main course of a gourmet dinner. This is not to diminish the importance of Article 3. It is the building block upon which Article 4 rests, and it is referenced throughout Article 4 by necessity.

Part 1 — General provisions and definitionsApplicability

Although it is called the “Uniform” Commercial Code, we know by now that there can be slight variations in the vari-ous provisions of the UCC from state to state. Ours is indeed a mobile society. Suppose a cherry farmer from Michigan meets a fruit wholesaler from Kentucky in Ohio and the two agree to a deal by which the wholesaler will purchase the farmer’s goods. Suppose the wholesaler pays for the cherries with a check drawn on her bank in Indiana. On her way back to Michigan, the farmer decides to deposit the check in a Chicago bank. Is the liability for the Chicago bank for whatever action or nonaction it takes with regard to that check controlled by the laws of Michigan, Kentucky, Ohio, Indiana, or Illinois? Section 4-102 answers the question: clearly Illinois law controls.

Section 4-102 provides that the liability of a bank for action or nonac-tion with respect to an item handled by it for purposes of presentment, payment, or collection is governed by the law of the place where the bank is located. §4-102(b). Given the mechanized sys-tem of bank collections now in place, the drafters of the Code found it impera-tive that one law govern the actions of any single bank.

In fact, had the farmer in our example deposited the check into a branch of her Chicago bank that was located in Michigan, §4-102(b) provides that the law of Michigan would apply because that is where the branch office is located. All of which is to say that Article 4 provides



a fairly clear answer to any questions of conflict of laws: look to the state in which the bank branch is located at which the item enters the payment system (for example, the “depositary bank”).

Variation by agreement; measure of damages; action constituting ordinary care.

Many of the provisions in Article 4 can be changed by agreement between parties. However, the parties are never allowed to disclaim a bank’s responsibil-ity when it has failed to exercise ordi-nary care or its duty to act in good faith. §4-103(a). It is also important to note that any Federal Reserve regulations and operating circulars or clearing-house rules are given, in §4-103(b), the effect of agreements which override the provi-sions of the UCC, whether or not they are specifically agreed to by all parties involved in the handling of an item. Thus Federal Reserve regulations, operat-ing circulars, and clearinghouse rules supersede Article 4 whenever they are in conflict.

It is important to note that various sections of the Federal Reserve Act (12 U.S.C. §221 et seq.) authorize the Board of Governors of the Federal Reserve System to direct the Federal Reserve banks to exercise bank collection func-tions. For example, Section 13 of the Act (12 U.S.C. §342) authorizes the Board to require each Federal Reserve bank to receive deposits from nonmember banks solely for the purposes of exchange or of collection. Under this statutory authoriza-tion, the Board has issued Regulation J, which is discussed in the next chapter. Another federal statute, the Expedited Funds Available Act (12 U.S.C. 4007(b))

provides that the EFAA and Regulation CC (12 C.F.R. 229) supersede any provi-sion of the law of any State, including the Uniform Commercial Code, which is inconsistent with the EFAA and Regulation CC.

Definitions

In order to assist in understanding the workings of Article 4, it is useful to clarify the definition of the participants in the check collection system. §4-105 provides definitions for these basic terms as follows:

• Bank means a person engaged in the business of banking. The term includes, among other things, a credit union. As mentioned above, although credit unions and banks tend to prefer to distinguish themselves from one another, in the context of the UCC it is beneficial to treat them as the same.

• Depositary bank means the first bank to take an item even though it is also the “payor bank”, unless the bank is the payor bank and the item is presented for immediate payment over the counter.

• Payor bank means a bank that is the drawee of a draft.

• Intermediary bank means a bank to which an item is transferred in course of collection except the depository or payor bank.

• Collecting bank means a bank han-dling the item for collection except the payor bank.

• Presenting bank means a bank pre-senting an item except a payor bank.

Natural person credit unions will



almost always find themselves in the role of either “depositary banks” or “payor banks” in this scheme.

These definitions should be borne in mind throughout the remainder of this chapter, as the various rights, duties, and responsibilities assigned the vari-ous participants in he check collection process can differ depending on how a particular entity is classified. For exam-ple, some checks are made “payable through” a particular bank. That lan-guage makes the named bank a “collect-ing” bank, not a “payor” bank. §4-106.

The huge volumes of checks processed each day must go through a series of accounting procedures, each of which consume time. As it is in many aspects of commerce, time is of the essence in the check collection arena. As such, §4-108 provides a little breathing room for the participants. It provides that a bank may fix an afternoon hour of 2 p.m or later as a cutoff time after which deposits received will be considered to be made at the opening of business on the next bank-ing day. Note, however, that Regulation CC includes special provisions by which credit unions must notify their members if they choose to establish such a cutoff.

Statute of limitations

Claims by various parties against each other under the UCC can arise in many different ways as we have already seen. Generally, the Code requires that any claims be made promptly. Participants in the check collection system tend to promptly report and pay valid claims, because the entire credibility of the bank-ing system depends upon prompt settle-ment. In some cases, however, there will inevitably be a dispute between partici-

pants. Under the 1990 amendments to Article 4, a new section was added to pro-vide that a suit to enforce claims under Article 4 must be brought within three years after the claim first arose. §4-411. Thus, for the first time the Code has standardized the statute of limitations for claims brought under this article.

Part 2 — Collection of items: depositary and collection banks

We’ve already discussed the general world of negotiable instruments above. As we’ve seen, negotiable instruments are quite useful in the conduct of commerce particularly when all of the players in the system can be reasonably sure of their rights and responsibilities.

In the typical buyer-seller transaction, the buyer will pay for her goods using a negotiable instrument, the vast majority of those being checks. Given their nego-tiable nature, those checks can then, in turn, be negotiated in further transac-tions, conceivably until there is finally no room left on the check for further endorsements. Throughout this process, Article 3 generally governs the rights, duties, and responsibilities of the parties.

Enter Article 4. But eventually, one of the parties will introduce the check into the realm of Article 4 by negotiating it in favor of a bank. From this point on, with some limited overlap with Article 3, Article 4 takes over.

The depositary bank, for example, the bank at which point the check enters the check collection system, is described as an agent or subagent of the owner of the item and any settlement given for the item is provisional. §4-201(a). In other words, when a credit union member



cashes or deposits a check, the credit (whether in the form of cash or a depos-it) is provisional until final payment is made on the item. This is true regard-less of the form of endorsement on the check. It is not always easy from the depositor’s end to know when settlement on an item becomes final. As we will discuss below, payor banks have specific time frames within which they must dis-honor a check, or it is considered paid. But the Code does not then require that any notice be made that an item was, in fact, paid. Considering the millions of checks which successfully clear bank and credit union accounts on a given day, it would be chaotic to require any kind of notice of final payment. Happily, the vast majority of instruments are paid as designed; therefore the code adopted a sensible “no news is good news” approach in this regard.

In the event that an item for which provisional credit is given is eventu-ally dishonored, the Code provides the depositary bank with the right to revoke the provisional settlement. §4-214(a).

An item is finally paid by a payor bank when the bank has either paid the item in cash; settled for the item without having a right to revoke the settlement under statute, clearinghouse rule, or agreement; or made a provisional settle-ment for the item and failed to revoke the settlement in the time and manner permitted by statute, clearinghouse rule, or agreement. §4-215.

Example: To help illustrate the cover-age of various articles in the UCC, let’s consider a transaction between two parties, call them Smith and Jones, to a transaction in which Jones, a mem-ber of XYZ Credit Union, agrees to pay

Smith, a member of ABC credit union, on a contract for the sale of goods. The underlying contract for the sale of goods is strictly between Smith and Jones, and is governed by Article 2 of the Code. The method of payment selected by the parties brings Article 3 into the picture. After Jones pays Smith with a personal check drawn on XYZ Credit Union, let’s assume Smith brings the check to ABC Credit Union for deposit. At this point, Article 4 enters the picture. Article 4 then governs the series of transfers of the check from ABC Credit Union (a “bank” for purposes of the UCC) through various intermediary banks, until it is presented for payment to XYZ Credit Union. Figure 5.5 illustrates this process.

Timely action by collecting banks

Section 4-202 of Article 4 imposes a duty on collecting banks to exercise ordi-nary care in all of the following:

• Presenting an item or sending it for presentment.

• Sending notice of dishonor on nonpay-ment or returning an item to the bank’s transferor after learning that the item has not been paid.

• Settling for an item when the bank receives final settlement.

• Notifying its transferee of any loss of delay in transit within a reasonable time after discovering it.

That section goes on to state that a collecting bank exercised ordinary care by taking proper action before its midnight deadline following receipt of an item, notice, or settlement. The midnight dead-



Figure 5.5 Applicability of UCC

Smith & Jones Form Contract for Sales of Goods

Article 2, Sales, assigns rights and duties between Smith & Jones

Jones Pays Smith with Check Drawn on XYZ Credit Union

Article 3, Negotiable Instruments, assigns rights and duties between Smith and Jones with regard to the check. Jones is the “drawer” of the check, and Smith is the “payee”

of the check.

Smith Deposits Check at ABC Credit Union

With some overlap with Article 3, Article 4, Bank Deposits and Collections, assign rights and duties between Smith and ABC, and between ABC and subsequent banks

in the Collection process.

ABC Forwards Check for Collection Through Corporate Credit Union

Corporate Credit Union is an “intermediary bank” under Article 4.

It is also a “collecting bank.”

Corporate Forwards the Check to its Federal Reserve Bank

The Federal Reserve Bank is an “intermediary bank” and a “presenting bank” if it presents the check to XYZ Credit Union for payment.

XYZ Credit Union Pays the Check

KYZ Credit Union is the “payor bank”

Figure 5.5 shows which parts of the UCC govern the particular aspects of a hypothetical contract, and the

payment on that contract, between Smith and Jones. The rights and responsibilities between the “banks”

in the collection process are all governed by UCC Article 4.



line refers to midnight of the banking day following the day it received an item. §4-104(a)(10). So, for example, if a credit union accepts a check as a deposit from its member on Monday, the credit union has until midnight on Tuesday to forward the item for collection.

Unendorsed item

In the 1990 revision to Article 4, a new provision was added to clarify that if a customer delivers an item to a deposi-tary bank for collection, the depositary bank becomes a holder regardless whether the customer endorsed the item. If the bank meets all of the other requirements as discussed above in Article 3, it can also be considered a Holder in Due Course. §4-205.

Transfer and presentment warranties

Just as is the case under Article 3, participants in the check collection process make certain warranties to any other entities in the system to which they have forwarded an item, including the warranties that:

• The warrantor is a person entitled to enforce the item.

• All signatures on the item are authen-tic and authorized.

• The item has not been altered.

• The item is not subject to a defense that can be asserted against the war-rantor.

• The warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor, or, in the case of an unaccepted draft, the drawer.

These transfer warranties cannot be disclaimed with respect to checks. However, unless notice of a claim for breach of one of these warranties is given to the warrantor within thirty days after the claimant has reason to know of the breach and the identity of the war-rantor, the warrantor is discharged to the extent of any loss caused by the delay in giving notice of the claim. In other words, if the payor bank knows it has a claim for breach of a transfer or present-ment warranty, it must notify the warran-tor within thirty days.

If a draft is presented to the drawee for payment or acceptance and the draw-ee pays or accepts the draft, (a) the per-son obtaining payment or acceptance, at the time of presentment, and (b) a previ-ous transferor of the draft, at the time of transfer, warrant to the drawee that pays or accepts the draft in good faith all of the following:

• That the warrantor is, or was at the time of the draft’s transfer, a person entitled to enforce the draft or autho-rized to obtain payment or acceptance of the draft on behalf of a person enti-tled to enforce the draft.

• That the draft has not been altered.

• That the warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized.

The subtle but important distinction between transfer and presentment war-ranties is that transfer warranties are given to the immediate and any succes-sor transferee, while presentment war-ranties are given only to the payor bank. This distinction stems largely from a doctrine at the common law produced



by Lord Mansfield in the case of Price v. Neal, 3 Burr. 1354 (1762). In that case, Lord Mansfield concluded that a drawee should know his drawer’s signa-ture and should therefore bear the loss if the drawee pays a draft bearing a forgery of the drawer’s signature. At one time, financial institutions routinely examined their customer’s specimen signatures before deciding whether to pay a check. Today, they rarely do. Nevertheless, the rule of Price v. Neal has survived. Banks and credit unions have become accus-tomed to it, and they ensure against the risks the rule allocates to them. The moral of this story is, a paying bank cannot recover against a presenter for a forged drawer’s signature unless the pre-senter knew of the forgery. It can how-ever, recover from the presenter if any required endorsement is forged regard-less of the presenter’s knowledge.

Encoding and retention warranties

Article 4 adds special warranties with respect to encoding and retention because they are unique to the check collection process. Before a depositary bank enters a check into the check col-lection system, it “encodes” the item in the lower right hand corner of the instru-ment, using special magnetic ink which allows for automated transfer of the check from that point. As with any auto-mated system, human error inputting information can cause some difficult problems.

Suppose a check payable for $1,000 is instead encoded as $10,000. From the time the item is misencoded, it will be picked up by check machinery throughout the collection system as $10,000. Eventually, the drawee will

debit its customer’s checking account for an additional $9,000! When the custom-er notices the error, he will be entitled to a credit from his drawee bank (remem-ber, the bank cannot pay an item that is not properly payable). The drawee bank must then look to the presenting bank to recover the $10,000 credit it incorrectly gave it, the presenting bank must look to its intermediary bank, and so on.

Under §4-209, the bank that encodes an item warrants to any subsequent col-lecting bank and to the payor bank that the information is correctly encoded, and thus it must promptly provide credit for the error on demand.

Reminder: It is important to bear in mind that if the credit union is the payor bank, and one of its members checks is misencoded by some other financial institution, ultimately causing the mem-ber to bounce checks, the member will be entitled to more than just a correction of his account balance. Under §4-209, the credit union will have to refund any overdraft fees that it or various mer-chants charged its member, although the credit union should be able to recov-er those fees from the institution that miscoded the item.

Automation being what it is, it is no longer necessary to physically transport each paper item through the check col-lection system. Article 4 provides for “electronic presentment” which means an agreement, clearinghouse rule, or Federal Reserve regulation or operating circular providing that presentment of an item may be made by transmission of an image of it, or by information describ-ing it (this is known as a “presentment notice”). The electronic presentment agreement between banks may provide



that the item will follow the present-ment notice, or that it will be retained by a depositary bank or other collecting bank. §4-110. If a bank retains an item pursuant to an agreement for electronic presentment, it also warrants to any sub-sequent collecting bank and to the payor bank or other payor that retention and presentment of the item comply with the agreement.

Part 3 — Collection of items: payor banks Payor bank’s midnight deadline

As mentioned above, Article 4 con-tains very specific time frames within which a payor bank must dishonor an item. If the payor bank misses its deadline, it generally loses its right to dishonor the item. The payor bank has until its “midnight deadline” — which means midnight of the next banking day after the banking day on which an item is received — to either pay the item or return it. §4-302(a)(1). In general, if the bank fails to pay or dishonor an item within that time frame, it is accountable for the item. The payor bank’s liability for missing the midnight deadline is not, however, absolute. It may have defenses to payment, which will not be known to it within the time constraints of the midnight deadline rule. Recall our ear-lier discussion of transfer and present-ment warranties. A payor bank is not accountable for an item returned after its midnight deadline if it discovers that there has been a breach of one of the presentment warranties, or if it has proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the

payor bank. As the comment puts it, “A payor bank that makes a late return of an item should not be liable to a defrauder operating a check kiting scheme.”

It is important to note that Regulation CC addresses the payor banks rights and responsibilities with respect to its mid-night deadline as well. Regulation CC largely supplements, as opposed to con-tradicts or pre-empts, the UCC in this regard. See Note 9 in the Official Staff Commentary to §229.30 of Reg CC (12 C.F.R. 229.30) for more information on that point.

Part 4 — Relationship between payor bank and its customerWrongful dishonor

A credit union may honor its mem-ber’s check even if it creates an overdraft, unless it has a contractual arrangement with the member not to pay a check that overdraws the member’s account (most credit unions include language in their checking account agreements that specifically provides the credit union the right to pay an item even if it creates an overdraft). If the credit union, however, dishonors an item that is properly payable, the dishonor is wrongful. The credit union will be liable to its member for damages proxi-mately caused by the wrongful dishonor of an item. Liability is limited to actual damages proved and may include dam-ages for an arrest or prosecution of the member or other consequential dam-ages. §4-402(b). These damages can, in extreme cases, be fairly drastic. A num-ber of courts have even held that dam-ages for wrongful dishonor can include damages for emotional distress (see for



example, Farmers & Merchants State Bank v. Ferguson, 617 SW2d 918).

Proper endorsements

As we’ve discussed, the Code pro-vides that a credit union may pay an item from a member’s draft account only if it is properly payable. If the member has the funds in the account and the item is authorized for payment by the member, the item must be paid and the credit union can be liable to the member for wrongful dishonor if it fails to do so. The 1990 amendments to Article 4 go on to say that an item is properly pay-able if it is authorized by the member in accordance with the agreement between the credit union and its member. “Authorized” means the item has been signed by the member and all endorse-ments are proper. In addition, the Code imposes the duty on the credit union to detect whether an item is not properly payable and reject those which are not. Most credit unions obtain share draft/checking endorsement to their bond to deal with this problem. This is a much more cost-effective alternative than examining every check.

Postdated checks

There is a common misperception that postdated checks are illegal. That is not true. Article 3 (in §3-113) clearly provides that checks can be postdated. Article 4, however, provides that the credit union may ignore the dates on member’s drafts — in other words, a credit union is not liable to its mem-ber if it clears a postdated check prior to the date on the check. Article 4 in §4-401(c) also provides, however, that

if the member notifies the credit union that he has postdated a check and pro-vides this notice in time for the credit union to be able to act on it, the credit union must treat the member’s notice as a stop-payment order. As we will discuss below, a stop-payment order generally expires in 14 days to six months. In the case of the postdated check, the stop-payment order would expire on the date the member put on the check.

Member’s right to stop payment; burden of proof of loss

A member or any person authorized to draw on that member’s account may stop payment of any item drawn on the member’s account — or even close the account — by an order to the credit union describing the item or account with reasonable certainty, received at a time and in a manner that affords the credit union a reasonable opportunity to act on it before any action is taken by the credit union with respect to the check (such as clearing it or certifying it). If the signature of more than one per-son is required to draw on an account, any of these persons may stop payment or close the account. In addition, if a credit union has a member that is a cor-poration and that corporation requires its checks to bear the signatures of more than one person, any of those per-sons can stop payment of a check inde-pendently of the others. §4-403.

Suppose a member alerts the credit union that a checkbook has been sto-len. Any stolen checks presented will be signed fraudulently by the thief and thus will, by definition, not be properly payable. The credit union should, there-fore, stop payment on the missing items.



Note, however, that because the items are not properly payable — and thus the credit union is already under a legal duty not to pay them — the credit union may not require the member to submit a stop-payment order. A question arises as to whether in this situation the credit union can charge its member a fee for stopping payment on lost or stolen checks.

No fee for stopping payment. Conventional wisdom has held that the credit union is not permitted to charge a fee for stopping payment in this situation. The Official Comment to the Code pro-vides that, “since such a check cannot be properly payable from the customer’s account, it is inappropriate for a bank to require a stop-payment order in such a case.” (§4-401, Comment 1.) In other words, although the mechanics may be the same whether the credit union is placing a stop payment at the member’s request or because checks have been reported lost or stolen, stopping payment because checks are lost or stolen is not technically a “stop-payment order” from the member, thus the opinion that no fee may be charged for this service.

It may be possible, however, to charge a fee for this service by identifying it as something other than a “stop-payment fee.” For example, the credit union can call the fee an “unauthorized check notice fee.” A credit union would need to disclose such a fee to its members as part of their checking account agreement before the credit union could assess it. This is a rather novel and fairly aggres-sive approach, and you should obtain the opinion of your own counsel before implementing such a fee. Keep in mind, most of the provisions in the UCC can be varied by agreement, but in no case can

the credit union disclaim its responsibil-ity for lack of good faith or its failure to exercise ordinary care. If a fee is deemed by a court to be charged in bad faith, the credit union will not be permitted to assess it. Some courts might find that a fee charged by the credit union when the credit union’s member has reported checks as lost or stolen — when the credit union already has a legal duty not to pay the items anyway — is unreason-able or made in bad faith.

The Code requires that members exer-cise “reasonable promptness” in review-ing statements to determine whether an unauthorized item was paid by the credit union. If the member promptly notifies the credit union that an unau-thorized item was paid, the credit union must then return the item. What con-stitutes “reasonable promptness” will vary depending on the facts of a given situation but in no circumstances — in most states, anyway — will the credit union be required to return an unauthor-ized item if the member reports it to the credit union more than one year after he has received the statement showing the item cleared. (§4-406(f)) There is some degree of variation with respect to the time frames within which the member must examine his statement from state to state, so it is important that you con-sult your local counsel on that issue in particular.

A stop payment can be taken orally or in writing. In general, stop-payment orders are effective for six months, but they lapse after 14 calendar days if the original order was oral and was not con-firmed in writing within that period. (§4-403(b)) A stop-payment order may be renewed for additional six-month



periods, provided a written stop-payment order from the member is given to the credit union within a period during which the stop-payment order is effective.

Credit union not obligated to pay check more than six months old

A credit union is under no obliga-tion to its member to pay a check that is more than six months old unless the check has been certified by the credit union. The credit union is not, however, liable to the member if it allows a check that is more than six months old to clear the account. §4-404.

Death or incompetence of customer

Suppose a member writes a check on his credit union account but dies before the check clears his account at the credit union. His estate or some other fam-ily member claiming an interest in the member’s account may try to assert a claim against the credit union for paying the item after the death of the member. §4-405 addresses this situation by pro-viding the credit union may safely pay such an item — even if it has knowledge of the death of its member — for 10 days after the date of the member’s death, unless the credit union is ordered by an individual with an interest in the account to stop payment of the check. §4-405(b). If a stop payment is ordered, it must be ordered in time to provide the credit union to take action before it has cleared the item. If the credit union is not noti-fied of the death (or incompetence) of a member, there is no such ten-day dead-line. That is, the credit union is within its authority to pay a check drawn on its member’s account, even if the member

dies or otherwise becomes incompetent after writing the check provided the credit union has no knowledge of the member’s death or incompetence. §4-405(a).

Member’s duty to discover and report unauthorized signature or alteration

The Code imposes a duty on a credit union to either return the items it has paid on an account or provide informa-tion on the member’s statement that is sufficient to enable the member to rea-sonably identify the items paid. §4-406. This section also provides the informa-tion provided is sufficient if it describes the items by number, amount, and date of payment.

If the items are not returned to the member, the person retaining the items (for example, the credit union or its share draft processor) must either retain the physical items or maintain the capacity to furnish legible copies of the items until the expiration of seven years after receipt of the items. A mem-ber may request an item from the credit union that paid the item and that credit union must provide in a reasonable time either the item or if the item has been destroyed or is not otherwise obtainable, a legible copy of the item. §4-406(b).

Note: Under the 1990 revision, the credit union must provide the original if it is still available. Most check proces-sors retain originals for 90 days. In many instances, a credit union member will ask for a check copy within that time frame. The Code now requires that if the original is still available, it must be provided.

Reasonable promptness. The credit union member “must exercise reason-able promptness” in examining his



statement or the items to determine whether any payment was not authorized because of an alteration of an item or because the member’s signature was not authorized. If based on the statement or items provided the member should rea-sonably have discovered the unauthor-ized payment, the member has a duty to promptly notify the credit union of all the relevant facts.

This section of the Code also address-es the situation where multiple unau-thorized signatures are made on a mem-ber’s checks by the same wrongdoer. Typically, this would mean the member was unaware his checkbook was miss-ing. Here, the Code imposes an abso-lute 30-day deadline on the member to detect the unauthorized items on his statement and to notify the credit union. If the credit union pays unauthorized items beyond the 30-day period, and it could have protected itself from paying the items had the member contacted the credit union within that time frame, the member will not be able to force the credit union to reimburse him for those items. §4-406(d)(2). As the comment explains the reason for this clear dead-line: “One of the best ways to keep down losses in this type of situation is for the customer to promptly examine the state-ment and notify the bank of an unau-thorized signature or alteration so that the bank will be alerted to stop paying further items.

Whether or not the member or the credit union breached any duty of care, a member must notify the credit union within one year after receiving his state-ment in order to have a valid claim that the credit union paid an item that did not include his authorized signature.

The Code imposes an absolute one-year time limit on the member to make a claim that an unauthorized check was paid by the credit union, in the case of an alteration of the amount or an unau-thorized drawer signature (that time frame is extended to three years in the case of unauthorized endorsements). §4-406(f).

Again, there are some variations on these general rules from state to state. Iowa, for example, requires the financial institution to retain cleared items or copies of retained items for 11 years as opposed to seven. Oregon, for another example, imposes an absolute 180-day deadline for the member to make a claim that an unauthorized check was paid by the credit union if the defect involves an alteration of the amount or an unauthorized drawer signature.

Considerations Regarding Policies and Procedures

UCC Articles 3 and 4 have a great deal of impact on the day-to-day opera-tion of the credit union. Credit unions may want to review the following ques-tions in determining whether they have a thorough understanding of their rights and duties under the Code.

• Does the credit union have a proce-dure in place by which a member can make a claim on a lost or stolen teller’s check or cashier’s check?

• Are tellers trained not to place stop payments on teller’s checks and cashier’s check?

• Are tellers trained not to cash teller’s checks or cashier’s checks that are



more than 90 days old?

• Does the credit union charge a stop-payment fee when stopping payment on a check or series of checks which has been reported as lost or stolen by the member?

• Does the credit union stop payment on postdated checks until the date speci-fied by its member?

• Does the credit union or its check processor retain copies of all member checks for seven years?

• If a member requests a copy of a check and the original has not been destroyed, does the credit union pro-vide the member with the original can-celled check?

• Does the credit union obtain member’s signatures on account agreements for each account opened by a member?

• Does the credit union include language in its loan and credit card agreements specifying that payments intended to pay a balance in full must be sent to a specified address?

• Does the credit union have a cutoff hour for determining the date on which deposits will be considered made? Is that cutoff hour later than 2 p.m? Is it disclosed to members as part of an account agreement?

• Does the credit union send notices to members when it dishonors checks?

• Does the credit union have a policy to pay its member’s checks even though payment will create an overdraft?

• Does the credit union promptly reject checks drawn on members’ accounts when the members have insufficient funds to cover the items?

• Are tellers trained to carefully avoid encoding errors?

Record Retention

Very few specific statutory and regula-tory guidelines are found in Articles 3 and 4. However, the following guidelines are imposed:

• Member Account Agreements. These should be retained forever. Closed-account membership agreements can be filmed after seven years has elapsed since the account was closed.

• Cancelled Checks. A credit union must retain the ability to reproduce a legible copy for up to seven years after the date the item clears; original items can be destroyed immediately after payment (again, check your local stat-ute for variations on this time limit).

Products and Services Affected By UCC Articles 3 and 4

All deposit accounts can be affected by the provisions of Articles 3 and 4 but particularly share draft accounts. With respect to share draft accounts, credit unions find themselves in the position of both “drawee bank” and “payee bank.”



Uniform Commercial Code Articles 3 and 4

Quiz/Study Guide

1. The UCC divides negotiable instruments into two categories. List these two categories and give an example of each one.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

2. If a check is made payable to “John Doe, Jane Doe,” who can cash the check?

_____________________________________________________________________

_____________________________________________________________________

3. There are three types of endorsements discussed in UCC Article 3 — special endorsement, blank endorsement, and restrictive endorsement. Give an example of each of these.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



4. If a member claims that a teller’s check, cashier’s check, or certified check purchased from your credit union has been lost, stolen, or destroyed, what rights does that member have in regard to replacing that check and how soon can a replacement be given to that member?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

5. Mary member prepared a written document for one of her clients and accepted a check for payment without noticing that the memo line on the check contained the words “Payment in Full.” Mary deposited the check and now wants to know if she has to accept this as full payment since the amount of the check was only half the amount owed to her. What one exception under “Accord and Satisfaction” must be met before the lesser amount must be accepted as full payment of the debt?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

6. Because the UCC varies from state to state, which state’s code governs when ABC Credit Union honors a check written on a financial institution in another state?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



7. Credit unions are subject to the encoding and retention warranties of UCC Article 4. When a credit union encodes a check, what is the warranty given to any subsequent banks concerning that check?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

8. Describe a credit union’s “midnight deadline” under UCC Article 4.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

9. Explain a credit union’s rights and responsibilities when a member postdates a check.

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



Uniform Commercial Code Articles 3 and 4

Answer Key

1. Draft — an order to pay such as a check or share draft. Notes — a promise to pay such as a loan. (Page 5-7)

2. Either John Doe or Jane Doe can cash the check. (Page 5-8)

3. Special endorsement The check is payable to “John Doe” who endorses the check with his name and adds “Pay to the order of Jane Doe.”

Blank endorsement The check is payable to “John Doe” and he endorses it “John Doe.”

Restrictive endorsement The check is endorsed, “Pay Jane Doe only” (Page 5-9)

4. The member must make a claim on a “Declaration of Loss” statement that reasonably describes the check. It must be received in time to act on the claim before the check is received at the credit union, and the member must provide proper identification if requested. (Pages 5-14)

5. Before a lesser amount must be accepted as full payment under “Accord and Satisfaction,” the debtor must have in good faith raised a bona fide dispute over the amount billed for the services. (Page 5-18)

6. The code of the state ABC Credit Union is located in. (Page 5-23)

7. Encoding a check warrants to any subsequent collecting bank and to the payor bank that the information is correct and must promptly provide credit for the error on demand. (Page 5-29)

8. Midnight deadline — an item that will not be paid must be returned by midnight of the next banking day after the banking day the item is received. (Page 5-30)

9. Article 3 (§3-113) provides checks can be postdated. However, Article 4 gives the credit union the right to ignore that date. Article 4 also states that if a member notifies the credit union of a postdated check before that date and in time for the credit union to act, this notice must be treated as a stop-payment notice and should be honored. (Page 5-31)


SECTION 6 – UNIFORM COMMERICAL CODE ARTICLE

4A AND REGULATION J


From Paper Instruments to Bits and Bytes

In the last section we discussed the rights, duties, responsibilities, and liabilities of the parties involved in the transfer of negotiable instruments in general (UCC Article 3) and in the check collection process (UCC Article 4) spe-cifically. Those statutes are the result of decades — indeed in some cases centu-ries — of practice and judicial opinions.

But the body of laws regarding check collections and negotiable instruments is all built on the central premise that ultimately it is a paper document which determines the rights of parties. With the explosion of technology in the past two decades or so, the use of payment sys-tems that are entirely electronic in nature has become more and more prevalent. Because the structures of Articles 3 and 4 are based upon paper instruments, there was in the beginning no compre-hensive body of law that clearly defined the legal relationships between the vari-ous parties to electronic transfers.

To fill this void in the law, the NCCUSL and the ALI in 1990 devel-oped a new article to add to the Uniform Commercial Code — Article 4A: Funds Transfers. In drafting Article 4A, a delib-erate decision was made to treat funds transfers as a unique method of payment that would be governed by a unique set of rules which would address the partic-ular issues that are raised in this method

of payment.Article 4A is now the law in all

American jurisdictions. As is the case with Articles 3 and 4, however, each state is free to tailor this article to its particular needs and each state’s Article 4A may, therefore, differ slightly from the language of the Code that we will discuss in this chapter.

To further muddy the waters, fed-eral Regulation J must be considered in determining various parties’ rights in funds transfers. Almost since its inception in 1913, the Federal Reserve System has been moving funds through-out the payment system. Early on the Reserve Banks installed a private tele-graph system for themselves and began to process transfers of funds via tele-graph. This telegraphic system remained in place until the early 1970s when the present Fedwire funds transfer system was put in place.

Fedwire plays a central role in the nation’s payment system. Depository institutions, including credit unions, use Fedwire to move balances to corre-spondent banks and send funds to other institutions on behalf of their customers and members. In addition, Fedwire is the exclusive payment transfer service used by the U.S. Treasury and other federal agencies to disburse and collect funds.

In addition to various governmental agencies and the Federal Reserve banks and their branches, Fedwire is used by roughly 11,600 depository institutions. The system transfers hundreds of tril-

Section 6 – Uniform Commerical Code Article 4A and Regulation J


SECTION 6 – UNIFORM COMMERICAL CODE ARTICLE 4A AND REGULATION J

lions of dollars each year between its various participants.

Regulation J (Reg J) was issued by the Federal Reserve Board among other things, to “provide rules to govern funds transfers through Fedwire.” Reg J §210.25, 12 CFR 210.25. Reg J and UCC 4A do not operate independently of one another — each makes reference to the other within its various provisions. In fact, Reg J incorporates the provi-sions of UCC 4A in Subpart B (see Reg J §210.25(b)). Reg J does make clear, however (as does UCC 4A), that in the event that there is an inconsistency between the provisions of Reg J and UCC 4A, the provisions of Reg J control.

If your head is spinning by now, don’t be alarmed — you are not alone. The interplay between Reg J and UCC 4A can be somewhat confusing (and we haven’t mentioned Regulation E, Regulation CC, or the National Automated Clearing House Association’s (NACHA’s) role in this discussion yet!). Before throwing in the towel, however, let’s consider what exactly Reg J and UCC 4A do and do not cover.

What Is a “Funds Transfer” Under UCC 4A and Reg J?

The term “funds transfer” is defined in Article 4A as “the series of transac-tions beginning with the originator’s payment order made for the purpose of making payment to the beneficiary of the order. The term includes any pay-ment order issued by the originator’s bank or an intermediary bank intended to carry out the originator’s payment

order. A funds transfer is completed by acceptance by the beneficiary’s bank of a payment order for the benefit of the beneficiary of the originator’s payment order.” §4A-104(a). We’ve emphasized a few of the terms within that definition so that the reader will bear in mind that each of them has its own definition in UCC 4A, as will be discussed below.

An “originator” of a funds transfer is the sender of the first payment order in a funds transfer. §4A-104(c). In the typical credit union setting, the credit union’s member would be the originator of a funds transfer.

A “payment order” is an instruction of a sender to a receiving bank transmit-ted orally, electronically, or in writing to pay or cause another bank to pay a fixed or determinable amount of money to a beneficiary provided all of the following apply (§4A-103(a)):

• The instruction does not state a con-dition to payment to the beneficiary other than time of payment.

• The receiving bank is to be reimbursed by debiting an account or otherwise receiving payment from the sender.

• The instruction is transmitted directly by the sender to the receiving bank.

The “receiving bank” is the bank to which the sender’s instruction is addressed. §4A-103(d). In other words, this is the bank that receives the pay-ment order into the banking system.

If the originator is not a bank, then the receiving bank to which the sender’s payment order is issued is the “origina-tor’s bank.” §4A-104(d). If the origina-tor is a bank, the terms “originator” and “originator’s bank” have the same



meaning.The “beneficiary” is the person to

be paid by the beneficiary’s bank. §4A-103(b).

The “beneficiary’s bank” means the credit union or bank identified in a pay-ment order in which an account of the beneficiary is to be credited pursuant to the order. §4A-103(c).

Finally, an “intermediary bank” is a receiving bank other than the origina-tor’s bank or the beneficiary’s bank. §4A-104(b).

To illustrate how all of these terms fit together, consider the case of John Doe, a member of ABC Credit Union. John instructs ABC credit union to pay $5,000 to Jane Doe’s account in XYZ

Credit Union. ABC Credit Union car-ries out (for example, “executes”) this order by issuing a payment order to Corporate Credit Union (for purposes of our example, assume both ABC and XYZ credit unions have accounts at Corporate Credit Union) to pay $5,000 to Jane Doe’s account in XYZ Credit Union. Corporate Credit Union will execute ABC Credit Union’s payment order by issu-ing a payment order to XYZ Credit Union to pay $5,000 to Jane Doe’s account in XYZ Credit Union. The transfer of $5,000 from John to Jane Doe is com-pleted when XYZ Credit Union “accepts” the order and credits Jane’s account.

Refer to figure 6.1 for an illustration of this transaction.

Figure 6-1 A Typical “Funds Transfer” Between Credit Unions.

Figure 6.1 shows a series of transactions in a simple wire transfer from a member at one credit union to a member at another credit

union. The example assumes that both credit unions are members at the same corporate credit union. The rights and responsibilities

between the parties to this transaction are all governed by UCC Article 4A.

John Doe instructs ABC

Credit Union to pay $5,000

to Jane Doe by wiring the

funds to her account at XYZ

Credit Union.

John has created a “pay-

ment order” governed by

Article 4A. John is the

“originator” of the payment

order. ABC CU is the “origi-

nator’s bank.”

Corporate Credit Union

debits ABC Credit Union’s

account at Corporate,

credits XYZ Credit Union

account at Corporate, and

issues a payment order to

XYZ Credit Union.

XYZ CU is the “beneficia-

ry’s bank” under UCC 4A.

ABC Credit Union issues a

payment order to Corporate

Credit Union.

ABC CU has “accepted”

John’s payment order by

executing it. Corporate

Credit Union becomes an

“intermediary bank.”

XYZ Credit Union credits

the account of Jane Doe

and notifies her.

Jane is the “beneficiary

under UCC 4A.



As this illustration demonstrates, a payment under Article 4A typically involves an overall series of transactions. In the parlance of 4A, John Doe is the originator; ABC Credit Union is the origi-nator’s bank; Corporate Credit Union is the intermediary bank; XYZ is the beneficiary’s bank; and Jane Doe is the beneficiary. While on the surface, the end result is simply a payment from John to Jane Doe, in reality this is a series of transfers, each one of which gives rise to obligations incurred and duties owed between all of the parties to the transaction. In general, UCC 4A governs those rights. Add Fedwire into the mix, and Reg J rules apply (which, as mentioned, incorporate UCC 4A by reference).

For the most part, it is not an exag-geration to say that the entire process appears seamless to John and Jane Doe. Indeed, if all goes according to plan, the process is quite efficient. But what if John isn’t clear in his order to ABC Credit Union? What if, say, he pro-vides the wrong routing number for XYZ Credit Union? Or, perhaps, an incorrect account number for Jane? Suppose John supplies the correct information, but it is somehow lost in the translation through an error made by ABC or Corporate, and eventually Joe Smith finds the money in his account and withdraws it? Does XYZ have any duties other than to receive the transfer and credit Jane Doe’s account? These and other questions are dealt with in Reg J and UCC 4A.

The types of funds transfers covered by Reg J and/or UCC 4A include what are typically referred to as wire trans-fers (such as the type described in our illustration), Automated Clearing House

(ACH) transfers that are not covered by the Electronic Funds Transfer Act (EFTA) and Regulation E, and “book transfers.” A “book transfer” is simply a funds transfer from one member to another member’s account within the same credit union.

Funds Transfers Not Covered by Reg J and/or UCC 4A

Reg J and UCC 4A were designed with wholesale funds transfers — large-dollar, nonconsumer-type transactions — in mind. By and large, those types of transfers make up the scope of these rules. But not all consumer transactions are excluded from Reg J and UCC 4A. Consumer transactions which are not covered by Reg J and UCC 4A include the following credit transactions which are covered by the EFTA:

• Checks.

• ATM transactions.

• Point of Sale (POS) transfers.

• ACH debit transfers.

• ACH credit transactions covered by the EFTA.

• Telephone bill payment services.

• Any other transaction covered by the Electronic Fund Transfer Act (for example, home banking computer terminals or card-activated telephones).



The Credit Union as Receiver

Let’s discuss the rights and duties between the credit union and its mem-ber when the credit union is the origina-tor’s bank (or receiver) and the member is the originator (or sender). The credit union generally will be liable to its mem-ber if it executes a payment order that is not authorized by its member. UCC 4A-202(a) provides that a payment order is an authorized order of the per-son identified as sender “if that person authorized the order...” That may sound rather circular, but it means that if the credit union obtains its member’s writ-ten, signed authorization to receive a payment order, it has obtained an “authorized” payment order.

Security procedures

In a simple world, a signed written request to issue a payment order would be all that a financial institution would ever receive before it executed a pay-ment order. But if that were the case, the use of funds transfers as a method of transferring payments would certainly not be as useful as it has become — the process would be severely slowed down if every originator had to sign a written payment order.

Of course, ours is not a simple world. In a large percentage of cases covered by Article 4A, the payment order is transmitted to the originator’s bank elec-tronically. UCC 4A-202(b) provides that if a credit union and its member have agreed that the authenticity of payment orders issued to the credit union by the

member will be verified by a specified “security procedure,” then any payment order received by the credit union from that member is effective, as long as (1) the security procedure is a commercially reasonable method of providing security against unauthorized payment orders, and (2) the credit union can prove, if need be, that it accepted the payment order in good faith and in compliance with the security procedure.

Just how “commercially reasonable” a security procedure must be is a ques-tion of law which can only be deter-mined by considering the wishes of the member expressed to the credit union, the circumstances of the member known to the credit union (including the size, type, and frequency of payment orders normally issued by the member to the credit union), alternative security pro-cedures offered to the member, and security procedures generally used by members and credit unions (“receiving banks”) similarly situated. §4A-202(c). Credit unions may wish to confer with their corporate credit unions, local ACH, or local branch of their Federal Reserve Bank for more information on establish-ing “commercially reasonable” secu-rity procedures. The Federal Reserve Bank addresses this issue at length in its Operating Circular No. 6: “Funds Transfer Security Procedures.”

If a credit union and its member have agreed to a security procedure, the cred-it union can by written agreement with its member limit the extent to which it is liable to its member for errors in the execution of a payment order.

If the member refuses to agree to the security procedure offered by the credit union, the credit union can:



• Refuse to accept a payment order from that member.

• Accept a payment order from that member but assume the risk that it will be able to prove that the payment order was from its member.

• Have the member agree (in writing) to be bound by a security procedure selected by the member.

For example, Article 4A permits credit unions to rely on account numbers and routing numbers for identification pur-poses. If a credit union receives a pay-ment order which identifies an interme-diary bank or beneficiary’s bank by rout-ing number, and the payment order was transmitted pursuant to a security proce-dure for the detection of errors (or trans-mitted pursuant to the written, signed authorization of the sender), the credit union (“receiving bank”) may process the payment order on the basis of the routing number and be entitled to recov-er from the sender any loss or expenses in the transfer or attempted transfer if it is later discovered the number is incor-rect. The receiving bank has no duty to check the accuracy of the routing num-ber. In addition, if the payment order identifies a bank both by name and rout-ing number, the receiving bank may rely on either the name or the routing number as long as it has no knowledge that the name and number are not consistent.

Most but not all of the provisions of UCC 4A can be changed by agreement between parties. “By agreement,” that is to say a signed writing between the parties setting forth their various rights, duties, and responsibilities. Other pro-visions in UCC 4A can be amended by financial institutions merely by providing

members and customers with notice of the amendments. For example, a credit union can notify its members that if a member provides an account number or a name and account number of a ben-eficiary to whom payment is to be made and there is an error in the account number, the member will be liable to the credit union for any losses or expenses caused by the error.

A sample Wire Transfer Request which can be used by credit unions to obtain their member’s written autho-rization for wire transfer is included in Appendix 6-A of this section. In order to minimize a credit union’s liability with respect to a funds transfer, it is advisable to obtain a member’s signa-ture on such a form whenever possible and certainly before the credit union executes funds transfer requests via an order made by phone. A sample Wire Transfer Agreement, which should be used in conjunction with a Wire Transfer Request, is included in Appendix 6-B. Finally, a sample Wire Transfer Notice which can be used to change some of the duties and rights between credit unions and their members is provided in Appendix 6-C. It is advisable to send such a notice to all credit union mem-bers before receiving or sending any pay-ment orders on behalf of members.

Article 4A does not require that a credit union accept a payment order from its member. A credit union accepts the payment order when it “executes” it. A credit union executes the payment order as the originator’s bank when it issues a payment order intended to carry out the payment order of its member. §4A-209(a).



Notice of rejection

Suppose a credit union receives a payment order from its member and for some reason cannot or will not execute it. There could be any number of rea-sons for not executing the order — per-haps an equipment failure prevents the execution, for example. Although a credit union acting as a receiving bank which does not accept a payment order need not notify the sender that it rejected the payment order, it is pru-dent to do so. Failure to notify a sender that his payment order was rejected will not obligate the credit union to pay the order. However, if the sender has a bal-ance in the authorized account which would cover the payment order (for example, a sufficient withdrawable bal-ance), the credit union will be required to pay interest on the account (even if it is a noninterest bearing account) if it does not send a notice of rejection. See §4A-210(b).

The interest is payable in this case from the execution date until the sender receives notice, or for five “funds trans-fer business days” — whichever is earlier. §4A-210(b). A “funds transfer business day” is the part of the credit union’s business day during which it is open for the receipt, processing, and transmittal of payment orders, cancel-lations of payment orders, and amend-ments to payment orders. §4A-105.

A credit union which acts as a receiv-ing bank for its members may impose a service charge for executing payment orders. Note, however, that the credit union may not collect its charges for the services and expenses in connec-tion with executing the payment order

by deducting that amount from the pay-ment order it executes, unless the mem-ber specifically authorizes the credit union to do so. Absent the member’s agreement to do so, the credit union would be changing the terms of the pay-ment order if it deducted the service charges from the order, in effect execut-ing an unauthorized payment order.

Credit Unions as Beneficiary’s Banks

When the credit union’s role in a payment order is that of “beneficiary’s bank,” the credit union becomes obli-gated to pay the beneficiary when it “accepts” the payment order. At the same time, the originator’s bank is, of course, obligated to pay the credit union as beneficiary’s bank.

“Acceptance” in this context gener-ally occurs in one of three ways:

1. When the credit union pays the benefi-ciary.

2. When the credit union receives final set-tlement through a Federal Reserve Bank or at midnight of the day its account is credited at the sending bank.

3. At the opening of the next funds-transfer business day if the amount of the send-er’s order is fully covered by a withdraw-able credit balance, as in a book transfer.

§4A-404 provides that if a payment order is accepted by the beneficiary’s bank, the bank is obligated to notify the beneficiary of receipt of the order before midnight of the next funds-transfer busi-ness day following the payment date. If a credit union fails to notify its ben-eficiary of the receipt of each ACH pay-



ment by that deadline, the credit union is liable to the beneficiary for interest on the amount of the funds transfer from the day notice should have been given until the day the beneficiary learns of the receipt of the funds transfer by the credit union. §4A-404(b).

This duty to send notification of the receipt of a credit to a beneficiary can be avoided in one of two ways. First, the credit union and its member could exe-cute a written agreement which specifies that the credit union will not send notice each time it receives a payment order. Second, if the local ACH rules allow the beneficiary’s bank to forego notice to the beneficiary, and the credit union notifies its member of the existence of this rule, the credit union need not send a notice each time it receives an ACH credit on behalf of a beneficiary. The normal practice in most ACH systems is not to require notice to the beneficiary unless notice is requested by the beneficiary.

A credit union may (and definitely should) also notify its members that ACH credits received are provisional until the credit union actually receives the ACH payment (through a process known as “settlement”). This notice will enable credit unions to safely allow their members to withdraw funds from ACH credit transfers before the credit union actually receives the money and to recover the money from its member if the funds are not eventually received.

This is so because one of the ways a beneficiary’s bank “accepts” a pay-ment order is by paying the beneficiary. Remember, the credit union becomes obligated to pay the beneficiary when it “accepts” a payment order. Thus if a member is allowed to withdraw the

proceeds of a funds transfer, the credit union has made itself obligated to its member. If something occurs which prevents settlement — for example, the credit union never receives payment from the receiving bank — the credit union may be left holding the bag unless it has notified its members that all ACH credits received are provisional.

Protecting the Rights of the Credit Union in Funds Transfers

Various provisions in UCC 4A and Reg J give credit unions the ability to limit their liability provided they prop-erly notify their members. Credit unions should review the notices they provide their members to ensure they are shield-ing themselves to the extent possible. Some of the various ways in which credit unions can protect themselves are dis-cussed in the paragraphs below.

Cutoff time

The credit union’s various duties and liabilities with regard to a funds trans-fer are keyed on the execution date of a given payment order. For example, if a member has a sufficiently withdraw-able balance to execute a payment order made to the credit union, and the credit union intends to execute it (thereby “accepting” the payment order), it must do so on the execution date. UCC 4A and Reg J allow the credit union to establish a cutoff time after which a funds transfer may be considered received the next business day. What time a credit union selects as a cutoff



time is strictly an operational consider-ation — the credit union should consider how much time it will need following the receipt of a funds transfer to process it. Credit unions are allowed to establish different cutoff times for different types of funds transfers such as wire transfers, ACH transactions, or book transfers.

Note: establishing a cutoff time does not mean the credit union is required to treat all funds transfers received later than the cutoff time as being received the next day. Failure to establish a cut-off time means that all funds transfers will be treated as having been received on the day the credit union actually received them for purposes of determin-ing the credit union’s rights and obliga-tions under UCC 4A and Reg J.

Choice of law

If a wire transfer through Fedwire is sent or received by the credit union, Reg J will govern the rights between par-ties. In other words, if there is any kind of a problem with the transaction, the credit union’s claim against the Federal Reserve or another financial institution involved in the funds transfer will be governed by Reg J. If a notice is provided to the credit union’s members, they will be subject to Reg J in the transaction as well. Should a credit union not provide this notice, the member’s rights, duties, and obligations will be covered by UCC 4A, as adopted in the state in which the credit union is located. In the event that there is a problem in the funds transfer, the credit union is needlessly exposed to more liability than it should be if there is a difference between the rules as pro-vided by its state’s UCC 4A and Reg J.

It’s best to notify members accordingly so that all parties are on the same page.

Similarly, the credit union should notify the member that the Automated Clearing House system will be used if the credit union receives an ACH credit transfer into its member’s account and that those types of transactions will be governed by the rules of the National Automated Clearing House Association.

Member’s liability for beneficiary number error or routing number error

As discussed above, the credit union can notify its members that if a member provides an account number or a name and account number of a beneficiary to whom payment is to be made and there is an error in the account number, the member will be liable to the credit union for any losses or expenses caused by the error. This notice should specify that if a member identifies a beneficiary by name and account number, payment may be made to the beneficiary on the basis of the number provided by the member, even if that number identifies a person other than the named beneficiary. If this notice is provided before a funds transfer, the credit union can execute it, and will have no liability to recover funds transferred to an unintended party (assuming the credit union has executed the payment order according to instruc-tions). If the credit union does not provide this notice and an unintended beneficiary receives the funds transfer, the credit union will have to attempt to recover from the person who actually received payment.

Similarly, the credit union should



notify its members that if they present a payment order which identifies any financial institution in the funds transfer by name and routing number, the credit union may rely on the number provided by the member even if that number identifies a financial institution differ-ent from the named financial institu-tion. If this notice is provided, the credit union will be able to charge its member for any losses or expenses it becomes liable to pay other financial institutions in attempting to complete the funds transfer or due to completing it to the wrong financial institution. If the credit union does not provide this notice, it will be responsible for the incorrect number, and it will not be entitled to recover any losses and/or expenses from its member.

Choice of accounts

Credit unions should carefully con-sider the types of accounts from which they will allow members to wire funds. Allowing members to use all accounts for wire transfers can have an adverse impact on the credit union’s reserve requirements under Regulation D. If, for example, the credit union allows its members to wire funds out of their regu-lar shares without limitation, all of the credit union’s regular share accounts could very well be deemed “transaction accounts” under Regulation D, and the credit union will be required to meet the Regulation D reserve requirements with respect to those accounts. Typically, credit unions tend to limit their mem-bers’ ability to wire funds out of their checking accounts only.

Notification of credits

Assuming the credit union has con-firmed that its local ACH rules do not require that beneficiaries receive special notification each time an ACH credit is received (most ACH rules include this provision), it should notify its members they will receive notice of the receipt of ACH credit transfers in their regular peri-odic statements.

Notification regarding credits received by wire transfer are another matter. Credit unions can avoid their duty under UCC 4A to notify their members each time a funds transfer has been received on their behalf only if the credit union and the member have agreed that no separate notification of credits will be given. Simply notifying the member of this provision does not constitute an agreement with the member. In this regard, the credit union might wish to examine the volume of non-ACH funds transfers it receives on behalf of its members. If it has a very low volume, it may not be too terrible a burden to sim-ply provide notice to members each time the credit union receives a wire transfer on the member’s behalf. Conversely, if the credit union has a high volume, it would certainly save time and expense if the credit union could obtain its mem-ber’s agreement to forego a separate notice each time a wire was received.

If a credit union decides that it wants to have an agreement with its members enabling the credit union to simply notify its members via their regular periodic statement whenever the mem-ber receives a wire transfer, it should carefully review its existing account agreements. Some (not many) share



draft account agreements, for example, include a provision that enables the credit union to amend it simply by pro-viding a notice. If this is the case, the credit union can simply provide a notice to those members who have already agreed to the terms of the credit union’s share draft account that they will receive notification of all funds transfer credits received on behalf of their members in their members’ regular periodic statement. If it is unclear whether the credit union has the right to change any account agreement merely by provid-ing notice to the affected parties, local counsel should be consulted.

Provisional payment — ACH

As discussed earlier, credit unions should notify members that an ACH credit is provisional — that is, condition-al or temporary — unless and until the credit union actually receives payment for the credit.

Wire Transfer Policy Considerations

Credit unions may wish to consider the following list of issues that should be addressed in their Wire Transfer Policies.

Governing law. The policy should include an affirmative intent to comply with all government regulations affect-ing wire transfers including Federal Reserve Board Regulation J and the Uniform Commercial Code. If the credit union participates in an Automated Clearinghouse System, NACHA rules should be reflected in the policy as well.

Payment to beneficiaries. The policy should state that payments received via wire transfer on behalf of beneficiaries shall be paid to beneficiaries only after the credit union has received payments (payments received via ACH are posted as provisional credits under most ACH rules).

Fees. Credit unions should include in their policy the amount they will charge members for executing payment orders. Remember, a credit union may not deduct fees from the amount of any given wire transfer unless the member has expressly agreed that it do so.

Payment orders. The policy should affir-matively state that payment orders will not be executed for members unless the member has sufficient withdrawable funds in his account to cover the transfer.

Liability. As a matter of policy, the credit union should disclaim liability to the extent allowed by law for any consequen-tial, special, punitive, or indirect dam-ages or losses of a member incurred in connection with a wire or ACH transfer.

Payment of interest. The policy should clarify in those cases where the credit union is obligated to pay interest to a member due to a wire or ACH transfer, whether the interest will be calculated based on the daily rate then applicable to the member’s account or based on the Federal Funds Rate then in effect.

Notification of receipt of wire or ACH transfer. The policy should address whether the credit union will provide notice each time a wire transfer is received on behalf of a member.

Note: with respect to wire transfers



if the member agrees, the credit union can forego this requirement and simply notify members of incoming wires via periodic statements; with respect to ACH credits, the credit union can simply notify via periodic statements provided the member has been notified that this will be the method of notification.

Account limitations. The policy should address the types of accounts from which wire transfers may be made (share draft only is recommended). The policy should also address whether the credit union will perform “ACH originations.”

Note: ACH origination is beyond the scope of this manual. There are substan-tial risks to financial institutions engag-ing in originations. A local Automated Clearing House or corporate credit union would be a good source for information regarding ACH origination.

Security procedures. The policy should direct management to develop commer-cially reasonable security procedures to verify the authenticity and accuracy of payment orders or cancellations and to utilize those procedures before execut-ing any payment order for which the member has not signed a wire transfer agreement.

Wire transfer agreement. The policy should direct management to develop and use a written wire transfer agree-ment which must be signed by members before the credit union will execute payment orders. The agreement should include:

• A description of the credit union’s security procedure for wire transfer requests that are not made personally

at the credit union.

• An acknowledgment by the member that those security procedures are commercially reasonable.

• An acknowledgment by the member that he/she shall be liable for any pay-ment order or communication amend-ing or cancelling a payment order, whether or not authorized, that is issued in his/her name and accepted by the credit union in compliance with the security procedure.

• A statement that the credit union will not follow any wire transfer instruc-tions that violate the terms of the agreement, nor will the credit union follow instructions received that do not afford the credit union sufficient time to verify the authenticity of the instruc-tions.

• A statement that the credit union will not be liable for failure to comply with the terms of the wire transfer agree-ment caused by legal constraint, interruption, or failure of transmis-sion and/or communications facilities, war emergency, labor dispute, act of nature, or other circumstances beyond the control of the credit union.

• A statement that a member enter-ing into the wire transfer agreement agrees to indemnify the credit union, its agents, and employees against any loss, liability, or expense, including attorney’s fees resulting from or arising out of any claim by any person in con-nection with any matters subject to the agreement except where applicable law requires.

• A requirement that each member agree



to notify the credit union in writing of any unauthorized or erroneous pay-ment order within 30 days from the date the member first received notifi-cation from the credit union and that the order was accepted.

Cutoff hours. The policy should state the credit union’s cutoff hours for the receipt of wire transfers and for the pro-cessing of outgoing wire transfers.

Training. The policy should provide for regular and ongoing training for all staff involved in processing wire transfers and ACH credits. Credit unions should consider contacting their state leagues, their corporate credit unions, or their local clearinghouses for this type of training.

UCC 4A and Reg J — Issues for Follow Up

A number of issues have been raised in this section of the module which should be followed up to ensure the credit union’s wire transfer procedures are established with adequate controls. In addition to the policy provisions above, the following list is an attempt to highlight those items the reader might consider verifying.

• Review the credit union’s bond cover-age. Does it adequately protect the credit union in the wire transfer arena? Are ACH credits and/or debits covered as well?

• Review the various account agree-ments in effect for each different account the credit union offers. Do the account agreements address the

various rights and duties of the credit union and its members with respect to wire transfers and ACH credits and/or debits? If not, do the account agree-ments provide that the credit union can amend them by providing notice to the members?

Note: you may wish to consult legal counsel on that issue.

• Has the credit union sent all members a wire transfer notice in order to mini-mize its liability with respect to incom-ing wires and ACH transfers?

• Review the credit union’s form on which it obtains members’ autho-rization for wire transfers. Does it clearly state the limitations on liabil-ity assumed by the credit union? Is it incorporated into or used in conjunc-tion with a wire transfer agreement?

• Review the credit union’s wire transfer security procedure. Does it comply with the guidelines set forth by the Federal Reserve Board? For example, is it “commercially reasonable”?

Remotely Created Checks

A “Remotely Created Check” is a check that:

• is authorized by a consumer over the telephone,

• is not created by the paying financial institution,

• is not signed by the member on whose account the check is drawn, and

• bears a legend on the signature line, such as “Authorized by Drawer.”



Remotely created checks are also called “telechecks,” “preauthorized drafts,” and “paper drafts.” Instead of a signature, the check typically has the customer’s printed or typed name, or bears a statement that the customer authorized the check.

Currently, a remotely created check is subject to Articles 3 and 4 of the Uniform Commercial Code (UCC). The provisions of the UCC reflect that draw-ees of checks must bear the economic loss when the checks are not properly payable because the drawer did not authorize them. This is because the pay-ing institution, not the depositary insti-tution, is in the best position to judge whether the signature on the check is the authorized signature of its customer. However, remotely created checks do not have a signature to compare.

Regulation CC was modified to pro-vide that any institution that transfers, collects, or presents a remotely created check would warrant that the person on whose account the check is drawn authorizes the amount stated on the check, and issuance to the payee stated on the check.

Regulation CC also provides that the transfer and presentment warranties would apply only to institutions and would shift liability to the depositary institution. A paying institution would not be able to assert a warranty claim directly against the nonbank payee that created or transferred an unauthorized remotely created check, but would have a claim under other law. This is different than the UCC provisions, which apply to anyone that transfers a remotely created check.

Regulation CC and the commentary to the final rule provide a defense to a warranty claim. The depositary bank may defend a remotely created check war-ranty claim by proving that the member cannot assert a UCC claim against the paying bank for the unauthorized issu-ance of the check.

Traditional forged checks are excluded from these new warranties. Additionally, Regulation J was amended to make clear that the new remotely cre-ated check warranties apply to remotely created checks collected through the Federal Reserve Banks.

Record Retention

Records of wire transfers are addressed in the Bank Secrecy Act in module 2. Generally speaking, records of wire transfers must be maintained for a minimum of five years under that statute.

Member account agreements should be maintained on file for as long as they remain valid. If cancelled, they should be kept for at least seven years from the date of cancellation.



Appendix 6-A

Sample Wire Transfer Request

ABC CREDIT UNION

Wire Transfer Request

Member’s name: _______________________________

Account number: _______________________________

Driver’s license: _______________________________

Amount of wire transfer: $ ______________________________

Wire transfer fee: $ ______________________________

Total charge to account: $ ______________________________

Beneficiary’s name: _______________________________

Beneficiary’s bank: _______________________________

Routing number: _______________________________

Beneficiary’s account number: _______________________________

I hereby request that ABC Credit Union initiate the above wire transfer. I understand and have agreed to the terms of the Wire Transfer Agreement between myself and ABC Credit Union. I realize that requested wire transfers that are received by ABC Credit Union later than _________ p.m will be completed the following business day.

_________________________________________ (Member’s signature)

For internal use:

Request taken by: ________________ at ____________ p.m. on ______________

Verification number _______________________

Test number _______________________



Appendix 6-B

Sample Wire Transfer Agreement

ABC CREDIT UNION

Wire Transfer Agreement

The following rules shall apply to all wire transfers services provided by ABC Credit Union. As used in the Wire Transfer Request Agreement, the words “I,” “us,” “we” or “our” shall apply to and mean “ABC Credit Union.” The words “you” and “your” shall apply to and mean the member who has requested or utilized the wire transfer ser-vices stated herein. This Wire Transfer Agreement supersedes any inconsistent terms contained in ABC Credit Union’s member account agreements and any previous Wire Transfer Notice and/or Agreements. This Wire Transfer Agreement is subject to modi-fication and or termination upon five days’ written notice to you.

Acceptance of Payment Orders

In general, we will accept payment orders only if you have signed a Wire Transfer Agreement, signed an Authorization for Transfer form, have a sufficient withdrawable balance on deposit in the appropriate account to execute the payment order, and produce valid identification. Once you have signed a Wire Transfer Agreement, we will accept telephonic payment orders from you provided our security procedures are followed.

Security Procedures

Once you have signed a Wire Transfer Agreement and provided us with [insert secu-rity requirements such as a member-created password or other identifying information as the credit union requires in its security procedure policy], we will accept payment orders from you via telephone provided you have a sufficient withdrawable balance on deposit in the appropriate account to execute the payment order, and you provide the information above to us when you call to make your payment order.

You hereby acknowledge the security procedures described are commercially rea-sonable and that you have selected the security procedure offered by the credit union after due consideration of all such alternatives and your business circumstances including the size, type, and frequency of payment orders that you anticipate issuing to the credit union.

You hereby acknowledge that you will be liable for any payment order or commu-nication amending or cancelling a payment order whether or not authorized, that is issued in your name and accepted by the credit union in compliance with the agreed-



upon security procedure.You hereby agree to follow the security procedure when making a payment order via

telephone.

Impossibility of Performance

The credit union will not be liable for failure to comply with the terms of a wire transfer agreement caused by legal constraint, interruption, or failure of transmission and/or communications facilities, war, emergency, labor dispute, act of nature, or other circumstances beyond the control of the credit union.

Indemnification

You hereby indemnify the credit union, its agents, and employees against any loss, liability, or expense (including attorney’s fees) resulting from or arising out of any claim of any person in connection with any matters subject to this agreement, except where applicable law precludes your notification.

Notification

You will not be provided with separate notification each time we receive a wire transfer into your account. We will provide you with notification of incoming wire transfers as part of your periodic statement. In the event we accept payments to your account through one or more Automated Clearing Houses (“ACH”), the operating rules of the National Automated Clearing House Association (“NACHA”) will be applicable to ACH transactions involving your account. These rules do not require that we provide you with next-day notice of receipt of an ACH item. As such, we will also provide you with notification of the receipt of these items as part of your periodic statement.

You hereby agree to notify us in writing of any unauthorized or erroneous payment order within 30 days from the date you first received notification from the credit union either that the order was accepted or your account was debited with respect to the order. Should you fail to promptly notify us of any unauthorized or erroneous pay-ment order as discussed above, we will not be liable to you for any subsequent similar occurrence that we could have prevented had we received such notice.

Choice of Law

We may accept on your behalf payments to your account that have been submitted by Fedwire and that are not subject to the Electronic Fund Transfer Act (“Regulation E”). Your rights and obligations with respect to such transfers shall be governed and construed in accordance with Regulation J, Subpart B—Funds Transfers Through Fedwire and the applicable Federal Reserve Bank Operating Circular. Whenever an ACH is used as part of a transaction that does not involve Fedwire, the rules of that ACH will govern that part of the transaction. Where none of the above-stated rules



apply, the transactions contemplated by this agreement shall be governed by the laws of the state of [insert name of state], including Article 4A of the [name of state] Uniform Commercial Code.

Funds-Transfer Business Day

Funds transfers occur on nonholiday weekdays (Monday through Friday) only. ABC Credit Union’s funds-transfer business days consists of the hours from 8:30 p.m. to 3 p.m. on those days we are open for business. Any wire transfers or receipts after 3 p.m. will be processed the following nonholiday weekday. Payment orders are executed as soon as possible after received; therefore, you should tell us immediately if you wish to cancel or modify wire instructions.

Account Limitations

It is the policy of ABC Credit Union to accept funds transfers from your [list types of accounts which members can use for funds transfers] accounts; however, with respect to [nontransaction accounts] accounts, we will allow you to make no more than six withdrawals or transfers to another credit union account that you own or to third par-ties by means of a preauthorized or automatic transfer or telephonic order or instruc-tion or similar order per month. Your account will be subject to closure if you exceed these limits.

Fees

We will charge you a fee of $[insert fee] for each payment order you give to us. If wiring instructions you provide are incorrect and the wire transfer is returned to us for any reason, you can provide us with the correct information that will permit us to execute the payment order again but in such a case you will be charged an additional $[insert fee]. ABC Credit Union makes no warranties with respect to fees charged by other financial institutions with respect to your payment orders.

Provisional Credit

Credit given by us to you with respect to an ACH entry is provisional until we receive final settlement for the credit entry through a Federal Reserve Bank. If we do not receive final settlement, you are hereby notified that we are entitled to a refund of the amount credited to you in connection with the credit entry. Moreover, you are hereby notified that the party making payment to you (the originator) shall not be deemed to have paid you the amount of the credit entry.

Your Liability for Incorrect Information

If you give us a payment order that identifies a beneficiary (the person to whom you are wiring funds) by name and account number or some other identifying number



(such as a Social Security, taxpayer I.D. or driver’s license), we may pay the benefi-ciary on the basis of the number provided to us by you and consider that number to be proper identification. This will be true even if the number you provided to us identifies a person different from the named beneficiary unless otherwise provided by law or regulation.

If you give us a payment order that identifies the beneficiary’s financial institu-tion in the funds transfer by name and routing and transit (“R/T”) or other identifying number, we, as well as the receiving financial institution, may rely on the number provided to us by you as the proper identification. This will be true even if the number provided identifies a financial institution that is different from the named financial institution unless otherwise provided by law or regulation.

Limitation of Liability

If we are ever obligated by law to pay interest on the amount of a transfer, you will be paid interest on a daily basis equal to the current dividend rate that is otherwise applicable to the account from which the funds transfer should have occurred. In the event we are ever liable to you for damages due to a transfer, your damages will be limited to actual damages only. We will not be responsible for incidental or conse-quential damages, court costs, or attorneys fees unless otherwise provided by law or regulation.

If you make a payment order which instructs us to wire funds to foreign countries, we assume no liability as to the length of time necessary to complete such a transfer provided we have acted in good faith with ordinary care and in compliance with appli-cable law.

I/We have read the above Wire Transfer Agreement and agree to its terms and con-ditions.

Date: _____________ Member’s Signature: _________________________________

Date: _____________ Joint Owner’s Signature: ______________________________



Appendix 6-C

Sample Wire Transfer Notice

ABC CREDIT UNION

Wire Transfer Notice

The following rules shall apply to all wire transfers services provided by ABC Credit Union. As used in the Wire Transfer Request Agreement, the word “I,” “us,” “we” or “our” shall apply to and mean “ABC Credit Union.” The words “you” and “your” shall apply to and mean the member who has requested or utilized the wire transfer ser-vices stated herein.

ABC Credit Union may accept on your behalf payments to your account that have been submitted by Fedwire. Your rights and obligations with respect to such transfers shall be governed and construed in accordance with Regulation J, Subpart B – Funds Transfers Through Fedwire. These regulations and state law are applicable to funds transfers involving your account.

If you give us a payment order that identifies a beneficiary (the person to whom you are wiring funds) by name and account or some other identifying number (such as a Social Security, taxpayer I.D. or driver’s license) we may pay the beneficiary on the basis of the number provided to us by you and consider that number to be proper identification. This will be true even if the number you provided to us identifies a per-son different from the named beneficiary unless otherwise provided by law or regula-tion.

If you give us a payment order that identifies the beneficiary’s financial institution in the funds transfer by name and routing number or other identifying number, we, as well as the receiving financial institution, may rely on the number provided to us, by you, as the proper identification. This will be true even if the number provided identi-fies a financial institution that is different from the named financial institution unless otherwise provided by law or regulation.

In the event we accept payments to your account through one or more Automated Clearing Houses (“ACH”), the operating rules of the National Automated Clearing House Association (“NACHA”) will be applicable to ACH transactions involving your account. These rules do not require that we provide you with next-day notice of receipt of an ACH item. Therefore, we will provide you with notification of the receipt of these items as part of your periodic statement.

In the event we are ever liable to you for damages due to a transfer, your damages will be limited to actual damages only. We will not be responsible for incidental or consequential damages, court costs, or attorney’s fees unless otherwise provided by



law or regulation.We may accept on your behalf payments to our accounts which have been trans-

mitted through one or more Automated Clearing Houses and that are not subject to the Electronic Fund Transfer Act (“Regulation E”). Your rights and obligations with respect to such payments shall be governed and construed in accordance with the applicable Federal Reserve Bank Operating Circular. Whenever an ACH is used as part of a transaction, its rules will govern that part of the transaction. Where none of the above-stated rules apply, the transactions contemplated by this agreement shall be governed by the laws of the state of (insert state).

Credit given by us to you with respect to an ACH entry is provisional until we receive final settlement for the credit through the Federal Reserve Bank. If we do not receive final settlement, you are hereby notified that we are entitled to a refund of the amount credited to you in connection with the credit entry. Moreover, you are hereby notified that the party making payment to you (originator) shall not be deemed to have paid you the amount of the credit entry.

This notice is effective as of ______________________.



Uniform Commercial Code Article 4A and Regulation J

Quiz/Study Guide

1. If a credit union decides to reject a payment order, does the credit union have an obligation to send the member a notice of that rejection? What possible liability could the credit union face for not sending a notice?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

2. Why should credit unions establish a cutoff time for processing funds transfer requests?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

3. Why is it important to include a disclosure or notice to members regarding their obligation to provide the sending credit union the correct name and routing number of the institution to receive the wire transfer?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

4. Why is it important to restrict members from making wire transfers from regular share accounts?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



5. What types of funds transfers are covered by UCC 4A and Regulation J?

_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________



Uniform Commercial Code Article 4A and Regulation J

Answer Key

1. A credit union acting as a receiving bank is not obligated to send the member a notice of rejection of the payment order. However, if no notice is sent, the credit union may be liable for the interest that would have been paid on the payment order. (Page 6-8)

2. Credit unions are not required to establish cutoff times. However, by not having an established cutoff time, all funds transfers must be treated as having been received on the day the credit union actually received them for purposes of determining the credit union’s rights and obligations under UCC4A and Reg J. (Page 6-10)

3. If this notice is provided to the member, the credit union will be able to charge the member for any loss or expense involved in completing the transfer or due to sending the transfer to the wrong institution based on the name and/or routing number provided. (Page 6-11)

4. If the credit union allows members to wire funds out of their regular share account without limitation, all of the credit union’s regular share accounts may be deemed “transaction accounts” under Reg D and those accounts will be subject to reserve requirements of that regulation. (Page 6-11)

5. UCC 4A and Regulation J cover: 1) transactions typically referred to as wire transfers, 2) Automated Clearing House (ACH) transfers not covered by Regulation E, and 3) book transfers. (Page 6-5)


The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted on July 21, 2010. Section 1075 of the Act amended the Electronic Fund Transfer Act (EFTA) by adding a new Section 920 regarding interchange transaction fees and rules for debit card transac-tions. Section 920 is implemented by the Federal Reserve Board’s Regulation II, which establishes standards for debit card interchange fees and prohibits net-work exclusivity arrangements and rout-ing restrictions. The law and regulation exempt credit unions and banks with assets less than $10 billion from the interchange fee provisions, but not from the routing requirements.

Compliance with the debit inter-change rules for federal credit unions will be enforced by National Credit Union Administration, and, compliance for all state-chartered credit unions will be enforced by the Federal Trade Commission.

Interchange Fee Limitations

The Dodd-Frank Act requires the Federal Reserve Board to “establish standards for assessing whether an inter-change transaction fee is reasonable and proportional to the cost incurred by the issuer with respect to the transac-tion.” Regulation II establishes a base fee cap of 21 cents plus 5 basis points

of the transaction amount to cover fraud losses. This provision is effective on October 1, 2011. The Federal Reserve Board also published an interim rule to allow an issuer to receive an additional 1 cent per debit card transaction if the issuer satisfies certain fraud prevention requirements. The interim rule is also effective on October 1, 2011. The inter-change fee limitations apply to institu-tions with $10 billion or more in assets.

Small Issuer Exemption

Regulation II contains an exemp-tion for small issuers (credit unions and banks with less than $10 billion in assets) as well as for government-admin-istered debit cards and certain types of prepaid cards. The $10 billion in assets threshold includes assets of the credit union as well as all of the institution’s affiliates, which is defined to include CUSOs or other entities that the credit union has: (1) ownership, control, or the power to vote 25 percent or more of any class of voting shares of the subsidiary; (2) control in any manner over the elec-tion of the company‘s directors or gener-al partners; or (3) the power to exercise a controlling interest in the company‘s management or policies.

These entities are not directly required to meet the rate setting require-ments of the rule, but are directly sub-jected to the routing and exclusivity pro-visions discussed below. A credit union‘s asset size will be determined based on

Section 7 – Regulation II: Debit Card Interchange Fees and Routing



its total assets as of December 31st of the prior year.

Payment card networks are permitted to develop two-tiered systems of debit interchange rates that provide favorable rates to small issuers (under $10 billion) and other exempt transactions (such as for government-administered payment cards or certain prepaid debit cards), and those networks would be permitted to rely on lists published by the Federal Reserve Board to help determine which institutions fall within the small issuer exemption.

Network Exclusivity and Routing Requirements (applicable to all issuers)

The exclusivity and routing provisions apply to all debit card issuers regardless of asset size, as required by the Dodd-Frank Act. This is the area of the regula-tion that directly requires affirmative compliance by credit unions that issue debit cards. The provision is effective for card issuers on April 1, 2012.

Network exclusivity

Regulation II requires a card issuer or payment card network to ensure that debit cards can be processed on at least two unaffiliated networks — one signature and one PIN network — if the card has both signature and PIN capabilities. Alternatively, an issuer could provide a debit card that can be processed on two or more unaffiliated signature networks, but not on any PIN networks, or that can be processed on two or more unaffiliated PIN networks,

but not on any signature networks. In addition:

• A smaller payment network may be a permitted network if it is will-ing to expand coverage to increased merchant demand and meets other requirements, including steps to pro-cess transactions reasonably expected to be routed to it.

• A permitted network may not be restricted to category of merchants.

• A permitted network may not restrict an issuer‘s ability to contract (e.g., restrictions on joining other networks or displaying another network‘s logo)

• A debit card does not have to display the brand, mark, or logo of each pay-ment network that the debit transac-tion may be processed.

• The exclusivity provisions apply to all issuers, even if the issuer does not have exclusivity arrangements.

• An affiliated network is permitted if the debit card can be processed on at least two unaffiliated card networks (e.g., a PIN network that is affiliated with a signature network, along with an additional unaffiliated network).

Routing

Regulation II prohibits issuers and payment card networks from limiting a merchant’s ability to choose the net-work on which a transaction is routed, with respect to those networks on which the debit card is enabled to be used. Prohibited routing restrictions include:

• Prohibiting a merchant from encourag-



ing or discouraging a particular meth-od of debit authorization, or

• Establishing network rules or issuer priorities that direct debit transac-tions, except if the merchant, or its acquirer or processor, does not have a routing preference or if required by state law.

• A payment network may offer pay-ments or incentives to encourage the merchant to route debit transactions to its network.

• A merchant and its acquirer may agree to a pre-determined set of routing choices that apply to all debit transac-tions.

• These routing provisions do not affect network rules on a chargeback or return.

This is just a snap shot of the inter-change regulations. For more detailed information on the requirements, visit CUNA’s E-Guide to Federal Laws and Regulations.

http://www.cuna.org/Compliance/Compliance-E-Guide/CUNA-e-Guide-for-Federal-Laws-and-Regulations/

http://www.cuna.org/Compliance/Compliance-E-Guide/CUNA-e-Guide-for-Federal-Laws-and-Regulations/