CUNA Mutual Group Risk Alert: Reg CC’s New Liability Provision

The final amendment to Regulation CC (Reg CC), published in September 2018, goes into effect January 1, 2019. The new rule creates a rebuttable presumption of alteration for substitute checks or electronic checks containing alterations or forged drawer signatures. This could impact your credit union’s schedule for retaining original paper checks as well as remote deposit capture service offering.

The Federal Reserve Board published a final amendment to Reg CC - effective January 1, 2019. The rule addresses disputes between financial institutions over whether a substitute check or electronic check contains an alteration or a forged drawer’s signature when the original paper check is not available for inspection. The rule creates a rebuttable presumption of alteration for substitute checks or electronic checks containing alterations or forged drawer signatures.

Additional detail regarding the new rule
Under the model Uniform Commercial Code (UCC), a paying institution may only charge a drawer’s account for checks that are properly payable (UCC 4-401, When a Bank May Charge Customer’s Account). Checks that are altered or contain a forged drawer’s signature are not properly payable.

A depositary institution is generally liable for accepting a check containing an alteration (UCC 4-208, Presentment Warranties). In the eyes of the UCC, a depositary institution is in the best position to determine if a check has been altered. The paying institution can pursue a presentment warranty claim against the depositary institution to recover the loss. In addition, paying institutions are generally liable for checks bearing a forged drawer’s signature since they can examine drawer signatures on checks presented for payment against specimen signatures the institutions have on file.

The new presumption of alteration provision [(§229.38(i)] applies to disputes between financial institutions as to whether a substitute check or electronic check contains an alteration or is derived from an original check that was issued with an forged drawer’s signature (the new rule uses the term, “unauthorized signature of the drawer”). If there is a dispute between the paying institution and depositary institution over whether a substitute check or electronic check contains an alteration or unauthorized signature of the drawer, the presumption is that the item contains an alteration. The new rule shifts the burden to the depositary institution for substitute checks or electronic checks containing an alteration or unauthorized signature of the drawer.

The presumption of alteration can be overcome by a “preponderance of evidence” that the substitute check or electronic check has not been altered or forged. In addition, the presumption of alteration ceases when the original paper check is made available for examination by all parties involved in the dispute. Furthermore, it does not apply when the original paper check is transferred between financial institutions in the forward collection process even if it is truncated and destroyed.

The new rule could impact your remote deposit capture service offering. A member could deposit an altered check or one that contains a forged drawer’s signature. If there is a subsequent dispute between the credit union and the paying institution over whether the substitute check or electronic check contains an alteration or is derived from an original paper check containing an unauthorized signature of the drawer, the credit union may not be able to obtain the original paper check from the member.

It could also impact credit unions' retention schedules for original paper checks. If a credit union is involved in a dispute over whether a substitute check or electronic check contains an alteration or unauthorized signature of the drawer, the credit union may not be able to defend itself if the original paper check has been destroyed.

Risk Mitigation
Credit unions should consider these risk mitigation tips:

  • Retain original paper checks for a longer period after truncation. You could establish a monetary threshold for retaining large dollar paper checks.
  • Establish eligibility guidelines for members to qualify for remote deposit capture.

Risk Prevention Resources
Access CUNA Mutual Group’s Protection Resource Center at cunamutual.com for exclusive risk and compliance resources to assist with your loss control efforts. The Protection Resource Center requires a User ID and password. Review this resource to learn more: