Ms. Jennifer J. Johnson
Secretary
Board of Governors of the Federal Reserve System
20th and C Streets, N.W.
Washington, D.C. 20551

Re: Docket No. R-1034; Options for amending Subpart C of Regulation CC, rules governing the collection and return of checks

Dear Ms. Johnson:

The Treasury Management Association (TMA) welcomes the opportunity to respond to the Board's request for comment on options for amending Regulation CC to permit the sending of notices in lieu of the original checks, when checks are returned for nonpayment.  The proposal would clarify the permissibility of electronic notices of return in a check truncation environment.

TMA represents more than 12,000 finance and treasury professionals who, on behalf of over 6,500 corporations and other organizations, are significant participants in the payments system.  Organizations represented by its members are drawn generally from the Fortune 1,000 companies and the largest of the middle market companies.  Many of TMA's members are responsible for the receipt and disbursement of check payments on behalf of their organizations.  They thus have a sizable stake in the efficiency and safety of the check collection system and in supporting innovations that result in further automation of payment processes.

Federal Reserve Board Regulation CC was designed to work in accord with the Uniform Commercial Code (UCC), which establishes state law, to govern the collection and return of checks.  However, there is a discrepancy between the two rules regarding the permissibility of notices of return when check truncation is used.  Under Reg. CC and its Commentary, a paying bank that decides to return a check is permitted to send a notice in lieu of return of the physical check only when the bank does not have and cannot obtain possession of the check or must retain it for protest.  Reg. CC does not permit a notice merely because the check is difficult to retrieve from a truncation system.  On the other hand, UCC Article 4 does allow the return of a notice if the check has been truncated.

In an effort to remove federal regulatory impediments to innovation in the payments area, the Board is proposing two options for amending  Reg. CC and/or its Commentary to permit notices in lieu of return when checks are truncated.  The Board requests comment on the feasibility and effectiveness of each option, and its benefits and burdens for the parties to a check transaction.

Option one would permit banks to return a notice of dishonor or nonpayment only when the notice follows the same path as the forward collection chain, as contemplated in  UCC Article 4.  However, this procedure may involve multiple banks and cause the notice to travel a lengthy and circuitous route.  Option two would simply delete the Reg. CC Commentary language disallowing a notice when a check is truncated.  The Commentary would state that notices are permissible whenever they would be permitted under the UCC.  This option would allow the return to be sent directly from the paying bank to the depositing bank without going back through the forward collection chain.

TMA Recommendation

TMA has long supported the conversion of payments from paper to electronic form.  However, the Board's proposal for notices in lieu of returns raises significant business issues which the Association believes must be clarified and resolved before the options for amending Reg. CC can be addressed.  TMA, therefore, reserves judgment on the alternatives that are proposed for permitting a notice in lieu of return, although option two appears to provide for a more efficient, expeditious return procedure.  TMA recommends that the Board further analyze the consequences of the proposed change and reissue a proposal which deals directly with the business issues and related operational, technical and legal complexities involved.

"Notice in Lieu" Formats

The Commentary to Reg. CC Section 229.30(f) defines the format and content of a notice in lieu of return.  It states that a check that is unavailable "may be returned by sending a legible copy of both sides of the check or, if such copy is not available…a written notice of nonpayment containing the information specified in section 229.33(b)…..Notice by telephone, telegraph, or other electronic transmission, other than a legible facsimile or similar image transmission of both sides of the check, does not satisfy the requirements for a notice in lieu of return."

Business Considerations

Re-deposited checks - Checks that are returned for nonpayment are frequently re-deposited by payees and subsequently collected.  The procedures by which businesses would redeposit a notice in lieu of the physical check should be clarified by the proposed regulation.

• How would a written notice or facsimile be re-presented by the collecting bank to the paying bank, either through its customary forward collection path or directly? How would an image be re-presented?

Collection of unpaid checks - Businesses that receive checks that are returned unpaid attempt to collect payment by contacting the payor directly or by sending the checks to collection agents.

• The information in a written notice of nonpayment, as specified in section 229.33(b), does not include the name and address of the payor.  If a legible image or facsimile of the front and back of the check is not provided to the payee, how can the collection process be carried out?
   
• Does the payee have a legal right to collect on a check returned for nonpayment without possession of the physical check?  Under UCC Article 3 Section 3-301, a payee who does not possess the check is not "a person entitled to enforce an instrument" unless the check has been lost, destroyed or stolen.

Identification of charge-back entity - Certain categories of businesses use the back of the check to further identify the destination or the source of the funds.  For example, brokerage companies identify their customers' designated investment or mutual fund on the back of the check.  Multi-location retail stores may use the back of the check to identify the store that deposited a check that was subsequently returned.

• A written notice of nonpayment will not contain information that would allow the depositor to charge back the item accurately.  Only a good quality image or facsimile of the front and back of the check would provide the depositor with this information.

Coordination Requirements

The ability of paying banks to provide notices in lieu of returns-whether an image or facsimile of the check or a written notice-appears to require detailed, prior coordination of processes and technology by all parties to the check payment transaction.  The impact of a notice in lieu of return on other electronic payment initiatives must also be evaluated and addressed.

• Businesses that obtain check image retrieval services from their banks would benefit from receiving electronic images of returned checks.  Businesses that do not use image retrieval services, do not have the equipment to do so, or use banks that do not provide this service, would be disadvantaged.  They would be subject to additional expense unless their banks were able to offer a choice of notice options.
   
• How would differing technical capabilities of paying, intermediary, and collecting banks be addressed?  What procedures would be followed if the paying bank wishes to return an electronic image of a check, but the collecting or intermediary banks are not able to accept it?
   
• Banks are expanding their use of electronic check presentment (ECP)-the electronic capture of check MICR information by the bank of first deposit and subsequent transmission to the paying bank.  Today, the physical checks follow, but truncation is contemplated as a future goal.  How can paying banks return an image or facsimile of the check if they do not have the original check?
   
• An ACH initiative, Represented Check Entries (RCK), provides for the conversion of consumer checks into ACH debits when they are returned because of insufficient or uncollected funds.  Without the physical check, how would this process be carried out, would it be legal under ACH rules, and would it require more manual and costly effort?

Conclusion

TMA supports the development of innovative payment services.  However, we believe that the Board's proposal has the potential to result in significant changes to business processes whose impact has not been addressed.  Nor has it been shown that businesses will receive faster notification of returned checks if a notice is sent in lieu of the physical check.  We cannot, therefore, determine if the benefits of electronic return notices would outweigh the increased costs involved, if any.  TMA urges the Board to evaluate the consequences of the proposed change in Reg. CC and reissue a proposal that addresses and resolves the questions raised in this comment letter.

TMA thanks the Federal Reserve Board for the opportunity to comment on this proposal. We would be pleased to cooperate with the Board to further clarify related business considerations.  Please call Arlene S. Chapman of TMA at 301-907-2862 if you have questions on the Association's statement.

Sincerely,

/s/ Nolan L. North, CCM
Vice President and Assistant Treasurer
T. Rowe Price Associates, Inc.
Chair, TMA Government Relations Committee