Regulation CC: Is it Time for a Change?
John S. Burnett, BOL Guru
How is your bank dealing with fraudulent cashier's and teller's checks?
One of the most heavily discussed topics on BankersOnline's Bankers' Threads is frustration with Regulation CC (implementing the Expedited Funds Availability Act) and its customer protections regarding "next day items," in particular cashier's and teller's checks. Fueling that frustration is the increased counterfeiting of these official bank checks, coupled with the apparent inability of some members of the public to recognize the scams that involve the bogus checks.
Background
Congress passed the Expedited Funds Availability Act (EFAA) in August 1987. The law itself is highly detailed, and leaves the Federal Reserve Board, charged with issuing regulations, little room for creative interpretation. Congress acted in response to consumer complaints of unreasonably-long holds placed on deposited checks. At the time, stories circulated that some of the most vocal consumers were some of metro Washington's more transient population -- congressional staffers.
In 1987, official bank checks were held in decidedly higher regard than they are now. Technology had not yet made them susceptible to high-quality duplication with intent to defraud. They were, in fact, widely regarded as "good a cash" for transactions in which standard checks were not accepted. Because of that wide acceptance, official checks were often the method used to open new bank accounts and make large transfers between accounts at different institutions. Those writing the EFAA decided to reduce to law the "good as cash" sentiment that had already attached to these checks, and there was no protest at legislative hearings that the checks would be widely counterfeited within the next 20 years. As a result, cashier's and teller's checks, along with other checks that Congress believed to be safe and "near cash," were labeled "next-day availability items."
Counterfeiting Official Checks
In the two decades since EFAA was enacted, technology has provided fraudsters with tools that make it easy to create counterfeit checks that are extremely hard to detect. Why are banks' official checks such attractive targets for these scam artists?
- There is no universal format or appearance for these checks that could make it easier to distinguish legitimate checks from counterfeits.
- The special next-day availability status of official checks facilitates scams involving counterfeits.
- Banks are severely restricted in their ability to delay funds availability involving official checks.
- Many banks no longer cooperate with telephone requests to verify the authenticity of checks or the sufficiency of balances to cover them.
- The public continues to believe that official checks are as "good as cash."
- Despite widespread attempts to publicize counterfeit check scams, fraudsters continue to be able to gull some bank customers.
Caught in the Middle
When a bank depositor has received a counterfeit official check and wants to deposit it, the depositary bank is often caught in the middle. Does the bank accept the deposit or refuse it? If it refuses the check, can the bank convince the customer to give up the check for collection (and accept the fees and delay that process involves)? Or will the customer keep the check only to make another attempt to deposit it at another branch or another bank? If the bank takes the check for deposit, how do bank personnel explain the difference between when the funds will be available and when the deposited check will be paid (or not)? Many bank customers don't understand that they are liable for returned deposited checks even if they have been able to withdraw and spend the money the check represented. That's all a recipe for conflict or tension between the bank and its customer when a counterfeit scam is successful.
Is it Time for a Change?
If your bank's customers have been victimized by counterfeit official check scams, your security officer is no doubt frustrated by the fact that Regulation CC contributes more to the success of these frauds than it helps banks avoid them. So is it time for a change?
The Fed has already clarified the EFAA definitions of cashier's and teller's checks by augmenting the wording in the law. Would it be outrageous to suggest the Fed could "further clarify" those definitions by adding another qualification -- that the authenticity of the check can be verified prior to deposit by telephone or other generally-accepted means?
Subsection 604(e) of the EFAA gives the Fed the authority to suspend parts of Regulation CC with regard to official checks if the Board of Governors determines that "depository institutions are experiencing an unacceptable level of losses due to check-related fraud" and the suspension is needed to reduce that fraud. Suspensions are only valid for 45 business days, unless Congress is in recess. Can the Fed be convinced to invoke such a suspension? Would such a suspension provoke Congress to act to reduce the risk to depositary institutions that accept counterfeit official checks for deposit?
Executive Steps:
- Find out from whoever in your institution handles check fraud cases just how significant the problem of counterfeit official checks is for your institution.
- Share that information with your Federal Reserve representative.
- Review your institution's efforts to educate its customers about counterfeit check scams, and consider expanding it. Educated customers who can't be duped are your best possible defense.
- Review your deposit contract language and customer communications to ensure that the depositor's obligation for charged-back checks and other items is clearly stated.
- Is your institution doing its part? Find out how you respond to calls from other bankers trying to authenticate your official checks. If you turn such calls away, consider reevaluating the decision to do so.
- Be sure that your compliance officer is on top of the situation, and working to prevent "cowboys" from placing holds that violate the regulation.
- Take steps to educate your representatives in Congress of the gravity of the problem. Getting Congress to undo part of what it considers consumer protection legislation is an uphill battle, to be sure, but we cannot blame Congress if it is unaware of the problem.
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First published on BankersOnline.com 4/24/07
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