As America’s check collection system continues to move away from being paper-based, the Federal Reserve Board is updating the liability provisions of Regulation CC to reflect this reality. After receiving comments on its proposed rule from financial institutions, trade associations, clearinghouses, and others, the Board published a final rule that amends Subpart C of Regulation CC to address situations where there is a dispute between banks as to whether a check has been altered or was issued with an unauthorized signature, when one bank has transferred an electronic or substitute check to the other bank and the original paper check is not available for inspection. The risk of liability under the old rules were split – the paying bank was responsible for forged checks and the depositary bank was responsible for altered checks.
The rule adopts a rebuttable presumption of alteration, rather than forgery, in disputes between banks over whether a substitute check or electronic check contains an alteration or an unauthorized signature. The presumption shifts the burden to the bank that warrants that a check has not been altered, which could be a depositary bank or collecting bank. In order to overcome the presumption, a depositary bank or collecting bank must prove by a preponderance of evidence that either (1) the substitute check or electronic check does not contain an alteration, or (2) the substitute check or electronic check is derived from an original check that was issued with an unauthorized signature of the drawer. Under the rule, the presumption shall cease to apply if the original check is made available for examination by all parties involved in the dispute.
As with existing rules under Regulation CC, parties may, by mutual agreement, vary the effect of the amendments’ provisions. The Board noted that it “expects that depository institutions will benefit from a uniform rule when there is an absence of evidence over whether a check has been altered or forged and may have reduced litigation and dispute resolution costs.” The presumption applies only to disputes between institutions; it does not apply to disputes between a bank and a customer. The amendments to Regulation CC become effective January 1, 2019.