The Expedited Funds Availability Act: Regulation CC, Check Endorsement Standards
The following endorsement standards, released by the Federal Reserve Board under Regulation CC, apply to all financial institutions as well as to businesses that receive checks for payment of services:
- ENDORSEMENT PLACEMENT: The bank of first deposit (depository bank) endorsement must be placed in an area three inches form the leading edge to one and a half inches from the trailing edge. This means that the endorsement will vary with the size of the item. The nine digit routing and transit number must be contained within that zone. All subsequent endorsements must be placed within three inches of the leading edge. Corporate or payee endorsements must be placed in the area one and a half inches from the trailing edge.
- INK COLOR: The Federal Reserve Board encourages the bank of first deposit to use purple ink for endorsements, however, it is not a requirement. Black ink may also be used by the bank of first deposit and for subsequent endorsements. Purple ink cannot be used for subsequent endorsements.
- ENDORSMENT CONTENT: Bank endorsements must contain the routing and transit number and the endorsement date. The bank of first deposit must utilize arrows pointing to their routing and transit number and indicate the name and location of the bank. Depository banks must accept return checks at all locations where they accept forward collection items.
The terms "pay any bank" and "Prior Endorsement Guaranteed" or "P.E.G." will no longer be necessary. The Board is urging that depository banks exclude such terms from their endorsements. Subsequent endorsements must not include these terms. Payee or corporate endorsement is not restricted in content, only size.
- WHO MUST ENDORSE: The Federal Reserve Board clarified that the depository bank endorsement should include the location where returned checks and notice of nonpayment should be directed. A bank acting on behalf of the "bank of account," such as a correspondent, may be the depository bank with the "bank of accounts" agreement. The depository bank endorsement would then be placed by the correspondent bank. The "bank of account" may also endorse the check, provided that the endorsement is not in purple ink and is not in the area designated for the depository bank.
- CARBON BAND CHECKS: The Board will not prohibit use of carbon band checks. They are encouraging banks to design endorsement stamps so that the nine-digit routing number avoids the carbon area. Other endorsing parties (i.e. corporations) are encouraged to protect the legibility of the depository bank endorsement.
- CORPORATE IMPLICATIONS: Retailers must meet the specified standards ensuring that their endorsements, either stamped or register imprinted, do not interfere with the bank of first deposit’s endorsement. This restriction will have an impact on the manner in which checks are endorsed at the point of sale. This will undoubtedly result in additional expense from retraining, new stamps, or new register imprint plates. For companies that process a large volume of remittances, the new requirements will necessitate a change in their check processing equipment. Companies that fine sort checks and package them for delivery to the depository bank or banks will be held liable for compliance to the regulation to the same degree as the depository banks.
- LIABILITY: The Federal Reserve Board has finalized the regulation for liability associated with losses for returned checks due to nonconformity. The paying bank is responsible for the condition of the back of the check when it is issued. An unreadable endorsement due to carbon bank or preprinted contracts, such as insurance claim drafts, or other material is the responsibility of the paying bank. The depository bank is responsible for the condition of the check after issuance and before acceptance by the depository bank, such as endorsements or other stamps placed on the check. As with the Uniform Commercial Code, the paying and depository have the ability to limit liability through agreements with their customers. Agreements may be binding through disclosures to customers.