Check Fundamentals and Check Processing

/ NCP 2016 Exam
ECCHO Training Series
Quiz Questions

“Check Fundamentals and Check Processing”

1. What do Article 3 and Article 4 of the Uniform Commercial Code (UCC) cover?

2. What does Federal Reserve Regulation CC implement?

3. Why are rules and agreements needed for the exchange of electronic check images?

4. Describe the routing number fractional form. When might this form be used?

5. The aux on-us field on a check is typically used for what purpose?

6. What is the difference between clearing and settlement?

7. Define float. What is negative float?

/ NCP 2016 Exam
ECCHO Training Series
Quiz Questions

Answer Key

Check Fundamentals and Check Processing

Check Fundamentals and Check Processing /
Question: / Answer: /
1. What do Article 3 and Article 4 of the Uniform Commercial Code (UCC) cover? / UCC Article 3 deals with negotiable instruments such as checks, money orders or traveler’s checks.
Article 4 covers bank deposits and collections.
Articles 3 and 4 of the UCC apply directly to uniform check law and work in combination with Federal Reserve regulations and operating circulars.
Additional Information:
The purpose and policies of the UCC, as defined in the first article, are to:
· Simplify, clarify, and modernize the law governing commercial transactions
· Permit the continued expansion of commercial practices through custom, usage, and agreement of the parties
· Make uniform the law among the various jurisdictions.
The Uniform Commercial Code is considered “model law”. UCC provisions do not have legal effect in a State or US territory unless enacted by the individual legislatures as statutes.
2. What does Federal Reserve Regulation CC implement?
/ Regulation CC (Reg CC) implements both the Expedited Funds Availability Act (1987) and the Check Clearing for the 21st Century Act (2003).
Additional Information:
The specific language in the regulation Subpart A § 229.1 states:
(a) Authority and purpose. This part is issued by the Board of Governors of the Federal Reserve System (Board) to implement the Expedited Funds Availability Act (12 U.S.C. 4001–4010) (the EFA Act) and the Check Clearing for the 21st Century Act (12 U.S.C. 5001–5018) (the Check 21 Act).
3. Why are rules and agreements needed for the exchange of electronic check images? / Rules and agreements are needed for image exchange because existing laws do not address the details of how these laws apply to electronic presentment of checks. Provisions of UCC and Reg CC govern the physical (paper) check but do not address details for electronic check image exchange.
Additional Information:
The 1990 revision to the UCC anticipated check truncation and image exchange. Section 4-401 states electronic presentment of items may be permitted pursuant to an agreement and further states such agreement be in the form of:
· Check clearinghouse rules (such as the ECCHO Rules); or
· Federal Reserve regulation or operating circular (such as OC 3)
4. Describe the routing number fractional form. When might this form be used? / The ABA Routing Number, also referred to as the ABA number or Routing Transit Number (RTN), may be shown on a check in MICR form and in the form of a fraction. For the fractional form, the numerator includes:
· City prefix – 1-49 or
· State prefix – 50-99; Prefix is followed by the ABA institution identifier.
· The denominator is Federal Reserve routing symbol. In the fractional form, ABA and Federal Reserve numbers match corresponding numbers in MICR form without leading zeros.
·
· Example: If the RT number is 111901234:
· Fractional forms: 88-123/1119 or 88-123
1119
·
The fractional form may be used to determine how to route an item if the MICR line is damaged. It can also be used for fraud control.
For example, by comparing the MICR line information to the fractional form printed on the check, it may be possible to determine if the check’s MICR line has been altered.
Additional Information:
The ABA assigns routing numbers through their official registrar, Accuity. This routing number was developed by the ABA to identify the specific financial institution responsible for the payment of a negotiable instrument.
Every financial institution in the U.S. has at least one and a single institution may have multiple RTNs. It is estimated there are about 27,000 active RTNs currently in use.
5. The aux on-us field on a check is typically used for what purpose? / The auxillary on-us field, or aux on-us, is an optional variable length field to the left of the routing field on the MICR line of a check. If an External Processing Code (EPC) is included in the MICR line, the auxiliary on-us field will appear to the left of it.
The aux on-us field is used on commercial checks typically for the placement of consecutive serial numbers or other account control or product information. Checks with an aux-on-us field are ineligible to conversion to ACH entries such as ARC, BOC, POP.
Additional Information:
NACHA Operating Rules (2013) § 2.5.13.4 RCK Ineligible Items:
· Does not list “checks with aux-on us field” as ineligible. However, the operating rules do state in § 2.5.13.3(g) that an eligible item. “is drawn on a consumer account.”
6. What is the difference between clearing and settlement? / The terms differentiate between the movement of information (data process) and the movement of funds (accounting process).
Using a simple example of image clearing:
Clearing is the movement of information that results in the exchange of payment information
· Example: Movement of checks/ images from banks where they are deposited to banks where they are drawn
Settlement is the movement of funds that results in the exchange of value
· Example: Movement of funds between institutions for payments that have been cleared
7. Define float. What is negative float? / Float is the time between the deposit of a check and final collection and funds availability to the customer.
Negative Float: Sum of dollars allocated against customer use of funds and correlates to calendar days elapsing between the bank’s receipt of funds and when those funds are made available to customer.
Additional Information:
Incurred float / “Bank float” – Non-earning asset created through delay in the collection of deposited funds. The dollar value of items that have been accepted for customer deposit but for which the bank has not received settlement from the Paying Bank
· Correlates to calendar days elapsing between posting of customer ledger credit and bank receipt of usable funds
Allocated float / “Customer float” – Sum of dollars credited to a demand deposit account but not available for immediate withdrawal/earnings credit. The dollar value of items that have been accepted for deposit but for which funds have not been made available to customer
· Correlates to calendar days elapsing between posting of customer ledger credit and funds made available to customer