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FOS Blog

16 Mar
2018

ECCHO, ECK, ECI – What the “E” is happening with electronic check processing?

ECCHO, ECK, ECI – What the “E” is happening with electronic check processing?

As a result of the days following 9/11 and commerce nearly coming to a complete stop, the Federal Reserve Board (FRB) realized the need for electronic check processing.  First,  a consolidation of check processing offices into one – the Cleveland FRB as of 2/27/10. Then the inception of ECCHO (Electronic Check Clearing House Organization) which is to electronic checks what NACHA is to ACH transactions.  ECCHO rules along with the realization that Check 21 (substitute check) resulted in complete truncation has guided the electronic check clearing process and recognition that Reg CC should be updated to align with today’s check image exchange processes.

On May 31, 2017, the FRB finally amended Subparts C & D of Regulation CC – Expedited Funds Availability Act to recognize electronic check image exchange.   These rules become effective on July 1, 2018 and  treat electronic checks the same as paper checks for indemnity and warranty purposes.

So, what’s that mean to your bank if you’ve already been operating under the ECCHO rules?

You need to understand:

  • The difference between an electronic check image (derived from a paper check and conforms to ECCHO X9 standards; ECK) and an electronically created item (created electronically but not from a paper check; ECI. Ex: customer provides a routing and account number over the phone).
  • Electronically created items (ECI) are not electronic checks under image exchange rules. Any bank in the collection process can be held liable for transferring an ECI to another institution.  It is only an interbank indemnity, not a customer indemnity.  How does this affect your current customer agreements?
  • The hierarchy and legal framework of the regulations – Reg CC, Subpart C will be the highest authority followed by ECCHO Interbank Rules, UCC, customer RDC (Remote Deposit Capture) agreements, and consumer mobile check image capture deposits.
  • Expeditious return timeframes are shortened to 2:00 pm (from 4:00 pm) on the 2nd business day following the day a check is presented to the paying bank.  Midnight deadline still applies and is applicable to both paper and electronic checks.
  • The threshold for in lieu of notice for both paper and electronic checks has increased from $2,500 to $5,000 which is expected to reduce the number of notices.
  • RDC indemnity: protection for the second depository bank that receives a paper check returned unpaid because it was previously used as an RDC deposit, protects the secondary bank if the originally deposited check is not properly endorsed or destroyed.
  • Appendix D regarding endorsements has been removed in favor of ECCHO’s X9 standards which apply to paper, substitute, and electronic checks.

Your action plan should include:

  • Reviewing deposit account agreements and RDC Agreements. Checking with any forms vendors.  Are revisions needed to stay compliant?  Do agreements address check image and retention practices for properly processing RDC and are there sound practices for processing RDC items to control exposure to loss?
  • Reviewing operational procedures for compliance with expeditious return and notice in lieu of thresholds. What needs to change to insure timely returns? Check with vendors to ensure windows have been updated.
  • Reviewing what effect the new RDC and ECI indemnities may have on check losses?
  • For institutions who are not fully processing checks electronically, reviewing what it takes for your institution to become a fully electronic check processor, which is the ultimate goal of these regulatory changes.
  • Monitor other resources such as ECCHO rules, Regulation J, and Operating Circular 3 for related changes.

So, there you have it.  That’s what the “E” is happening!

For additional information contact Cindy Tice at ctice@fosaudit.com, or Evelyn Dehmey at edehmey@fosaudit.com.

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