Compliance Blog

Written By Stephanie Lyon, Senior Regulatory Compliance Counsel, NAFCU

Regulation CC's compliance deadline was yesterday, July 1st. This means that, among other things, credit unions offering remote deposit capture (RDC) technology should have finalized any changes made to their RDC agreements, policies and procedures to ensure the correct restrictive indorsements are placed on these remotely deposited checks. For an overview of the newly added warranty and indemnity provisions for electronic checks, see this blog. To summarize, a credit union that accepts remotely deposited checks can be liable to another financial institution if the original check is deposited in that financial institution and the check does not bear the appropriate restrictive indorsement.

But what exactly is the correct restrictive phrase to use for a remotely deposited check? The answer to this question is twofold as checks are regulated by federal and state laws.

Federal Requirements

Final Regulation CC does not specifically defines what constitutes a restrictive indorsement. However, in determining what to require for the restrictive indorsement, it is important to note that only institutions that receive the original check can seek indemnity. For example, if a credit union and a bank both accept a check via RDC, neither the credit union nor the bank may seek indemnity because neither received the original check. For an indemnity claim to go forward, section 229.34(f)(2) essentially requires the original check to be presented. If the original check presented bears a restrictive indorsement, this should alert the financial institution accepting this check that it may have been presented for payment already by other means.

In the preamble to the final rule, the Federal Reserve Board explains that "for mobile deposit only" is an example of a restrictive indorsement that should raise a red flag to the financial institution accepting the original check. The commentary provides another example: "for mobile deposit at Depositary Bank A only." As these are just examples, other indorsements may also be sufficient so long as it shows the member's intent to deposit the check remotely and not physically. Because the rule did not specify the exact phrase a credit union should use, it seems that from a Regulation CC perspective, the wording the credit union chooses for its restrictive indorsement requirement will be a risk-based decision for the credit union.

State Requirements

Note that Regulation CC is not the only rule that applies to checks; there may be some applicable state law that provides additional guidance on what constitutes a restrictive indorsement. For example, the model UCC defines a restrictive indorsement as "an indorsement limiting payment to a particular person…" and bears a signature. This seems to indicate that the credit union's name should be listed in the indorsement to meet the definition of a "restrictive indorsement" under the UCC. As not all states have adopted the exact language of the model UCC, a credit union may want to check its state's law to determine the applicable requirements for restrictive indorsements. It may be possible that some states requires "for mobile deposit only at [Credit Union's Name]” to meet the definition of a restrictive indorsement, but it may also be possible that stating that this is "for remote deposit only" or "RDC deposit" should signal to a financial institution the item being deposited in person is not supported by the restrictive indorsement.

Ultimately, it will be up to the credit union to determine what to require for the restrictive indorsement of RDC checks based on Regulation CC and any applicable state law. For those reasons, credit union that are unsure whether their current RDC agreements, policies and procedures protect the credit union from liability, may want to consider reaching out to a local attorney for an opinion on what the restrictive indorsement must include in your state.

Finally, NAFCU created a redline of the changes to Regulation CC that may be helpful to understand everything that is now different in the rule. Members of NAFCU can access it here.  

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Programming Note.  In honor of Independence Day, NAFCU's offices will close at noon tomorrow and reopen Thursday, July 5. There won't be a blog on the 4th of July but we'll be back to blogging on Friday.  As for me, I will be spending my Fourth of July holiday in Belize!