Reg CC’s Indemnity Ruling: What You Need to Know

A new regulation has surfaced that will directly affect banks providing RDC (remote deposit capture) and mRDC (mobile remote deposit capture) as a service to their customers. And with a due date of July 1, 2018, adherence to this new regulation is coming up fast.

Reg CC’s New Indemnity Claim

The Federal Reserve Board finalized a new indemnity to address the allocation of liability when a depository bank accepts a check deposit through remote deposit capture—that is, when the depositor sends the bank electronic information about a check, such as a photographic image—which the bank uses to create an electronic check or substitute check for collection.

The new ruling states: “a bank that transfers a substitute check indemnifies any subsequent recipient against any loss the recipient incurs due to the receipt of a substitute check instead of the original check.”

This new Reg CC amendment is a concern for many financial institutions because it harbors potential liability for a check that isn’t endorsed properly.

A Real-World Example

Let’s use this example: a single customer (Joe) holds accounts at both Bank A and Bank B. In this scenario, Bank A offers RDC as a service to its customers, while Bank B does not. Joe receives a check for $1,000, which he initially sends via RDC to Bank A for deposit. However, Joe then proceeds to deposit the physical check at Bank B. The check has been cashed twice, once by RDC and once via traditional deposit.

Under this new rule, Bank B can file an indemnity claim against Bank A because Bank B may be unable to charge back funds from Joe’s account. This significantly shifts the liability toward banks issuing RDC or mRDC as a service.

Require Restrictive Endorsements

This new regulation allows financial institutions that offer RDC or mRDC services to protect themselves by requiring specific endorsements on their customers’ deposited items.

This special endorsement—known as a restrictive endorsement—is physically written on the check by the customer and indicates that the check in question is for RDC or mRDC deposit only.

Using our previous example, Bank A should’ve required a restrictive endorsement on its RDC check, which specified it as “for mobile deposit only.” If it had, the trained teller at Bank B would have seen the restrictive endorsement and wouldn’t have accepted the check for deposit. If Bank B had still accepted the check, Bank A would have the right to file an indemnity claim against Bank B.

Implementation Barrier?

Though this might not discourage banks from implementing RDC, it will take an effort to enforce the standard with their customers that use RDC or mRDC. Banks must be aware of the liability this regulation brings, and must take steps to mitigate that risk by changing their RDC or mRDC agreements to require restrictive endorsements as soon as possible. RDC and mRDC will only grow in popularity, and the potential benefits these services bring to your customers certainly offset the risk this regulation brings.

Steve Shoulta serves as CSI’s director of regulatory compliance.


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