When is a duplicate not a duplicate?
The Issue: An image item may be erroneously considered a duplicate when it is re-presented after it has been returned unpaid as an NSF.
No Duplicate Warranty: No party will be asked to pay an item twice is provided in Reg CC for substitute checks, in the Federal Reserve’s Regulation J/OC3 for image exchanges through the Fed and in the ECCHO Rules for private sector image exchanges.
The Scenario: An image is sent for collection and the paying bank returns the image as NSF. The item is re-presented either from the returned item that contains all of the endorsements and the previous return reason code or from the original item that was not cleared and that does not contain all of the endorsements and previous return reason code. The latter is not recommended.
Analysis: Since the item was returned as an NSF, it was not paid. Therefore, the re-presented item is not actually a duplicate under the warranties. Institutions need to verify whether duplicate suspects have actually been paid.
Additional Considerations: Items can be collected, returned and re-presented as fast as the same day using image exchange. The absence of a return reason code and/or endorsements does not mean the item was duplicated. Duplicate detection systems may need to be modified to account for accelerated image collection/return processes. Additionally, many institutions prefer to handle duplicates as adjustments rather than returns which creates the potential that a paying institution could miss its return deadline and loose its right to return. Examples of when an item may or may not be considered a duplicate is addressed in ECCHO’s Rules and Commentary in the no duplicate warranty Commentary.
The Check 21 Act creates the opportunity for banks to truncate checks without the agreement of all parties. This is accomplished through the creation of a new legal instrument, the substitute check, which is the legal equivalent of an original check. The substitute check provides an important transitional vehicle between original paper checks and image exchange. The introduction of substitute checks into the collection process sometimes results in duplicate payments. Duplicates can occur in both the forward and return processes. Duplicate prevention is performed by an institution that truncates the original check and creates either an electronic representation or substitute check. Banks creating image exchange files or substitute checks must examine every aspect of the process, from capture to file creation and/or printing. This is to help ensure that the creation system and operating procedures provide the appropriate safety and soundness so that the account holder is not subject to a loss as a result of a duplicate presentment.
Methods of prevention include:
- Validation of output control totals – file and cash letter level
- Duplicate file checking – check across multiple days within a five business day minimum to be considered
- Validation of first/last substitute check – typical bundle wrapping procedure of checking first and last item of the bundle to that printed on the listing
- Physical count of substitute checks – software counters in print manager can compare to input file
- Prior to submission for collection – collecting bank
- Transit warehouse – implies a repository of all items presented for collection in electronic or substitute check form during the current day as well as from prior days, such as a five business day period
- Additional processes in the collection process add the potential to impede the expedient collection of items due to the timing of research
For additional information about duplicate item prevention, refer to A Guideline Document on Duplicate Image/IRD Prevention and Detection.
Replacing Unpostable Account Numbers Not Necessary
In the normal course of business, banks receive items that cannot be posted based on the account number in the MICR line. Many banks strip the item and include an internal general ledger account number to facilitate processing. Banks needing to return this item as a substitute check, need to determine what number (if any) to place in the account number field. The internal general ledger account is not appropriate and does not represent the MICR line of the original.
Some banks are blanking out the account number field on the substitute check or replacing it with all nines, and returning it to the bank of first deposit (BOFD). While this avoids “looping” (continual attempts of clearing and return), it causes difficulty for the BOFD in automatically matching their incoming returns to identify the depositing customer.
When a bank considers how to handle these items, they need to evaluate it from both a paying bank and incoming returns perspective.
RT four dash four
Some check stock still contains RT numbers configured as four dash four. Since a substitute check can be corrected, a bank receiving a check configured with an RT of four dash four can correct that RT into a valid 9 digit RT with the correct check digit.
Zero Dollar Items
Some receivable systems require the issuance of a check even when the balance is zero to avoid receiving late notices. It was determined that these are valid items. However, they can cause operational problems and should be discouraged or even prohibited through the deposit agreement.
Best Practices for Remote Capture
Remote Capture, sometimes referred to as Corporate Capture, is one of the recent products offered by financial institutions of all sizes as a result of Check 21.
Remote Capture refers to a non-financial institution imaging a check, then transmitting that image to its bank for clearing. There are numerous devices that are used for this product. Some financial institutions require their customers use only devices that they recommend or provide, while others are more flexible by allowing the customer to utilize almost any device.
These products are offered by banks who offer various levels of service; from a total turnkey operation to minimum support. Financial institutions that offer this service are recommended to have legal agreements to identify the legal liabilities and risks associated with the product and properly assign those risks. Agreements will also typically include other logistical provisions, like time and delivery of files, pricing, availability, etc. Other organizations’ Web sites may provide more information on best practices for Remote Capture.
Retention of Original Item
Check 21 does not dictate the retention time for the original check. It is up to individual financial institutions to perform their own risk analysis to determine the appropriate retention period for their institutions. The only exception is when the image exchange provides a retention period through their agreements.
Retention periods vary from a few days to as many as 90 days, and high dollar items are kept longer than low dollar items.
Handling of Poor Quality Images
Currently, poor quality images can be handled as returns or adjustments. Many institutions believe they need to be adjustments so that the items are not mishandled and charged to a customer’s account.
Some financial institutions are refusing to accept poor quality images as returns or adjustments. Adjustment cases typically have a minimum dollar limit and if the poor quality image is below this limit, the receiving bank may not accept the adjustment.
Return Item Rejects
Financial Institutions are beginning to originate image returns. Poor image quality is one reason these items are rejected.
When image returns are rejected the Paying Bank is still legally obligated to send the return by the midnight deadline or potentially loss their right to return the item. Check law requires the Paying Bank receiving these rejected return items to be able to send the return by their midnight deadline (midnight of the day after presentment).
To avoid missing this deadline, the Paying Bank should incorporate appropriate procedures to minimize this risk.