PREP Guide - Check Products Flashcards
What is an Image Cash Letter (ICL)?
An electronic representation of a paper cash letter used to transport check transaction data, including check images, between organizations and systems for clearing check payments.
What does the structure of an ICL include?
It includes:
* File header and control
* Cash letter header and control
* Bundle header and control
* Detail records representing physical checks including check information, indorsement information, and images of the checks.
How do ICLs differ from remote deposit capture (RDC) processes?
ICLs are typically batch files with a significant volume of checks sent to the bank/processor, while RDC processes usually send a smaller volume of checks.
What industry standard is used to format ICLs?
ICLs are formatted in the accepted industry standard created by X9 and its associated companion document.
What information do ICLs contain?
ICLs contain and transport the image and MICR data captured from paper check transactions.
Who uses ICLs for check deposits?
ICLs are used to transmit checks between customers and their banks, as well as between banks and/or the Federal Reserve bank.
What type of customers typically use ICLs?
Corporate and correspondent bank customers use ICLs for delivery of check deposits to their banks.
What is an ideal scenario for using ICLs?
ICLs are ideal for companies with centralized in-house receipt processing, such as an in-house lockbox at a utility company or a correspondent bank with in-house check processing operations.
What capabilities must a customer have to use ICLs?
Customers need to have the ability to capture and transmit MICR data and check images.
How might banks assist customers in using ICLs?
Banks may require customers to create a properly formatted ICL file in the X9 standard, provide software to reformat data, or accept the data and do the reformatting.
What are some benefits of using ICLs for customers?
Benefits include:
* Reduced transportation costs
* Reduced or eliminated trips to the bank for deposits
* More efficient back-office processing
* Later deposit cutoff time
* Faster return processing and notification
* Secure, private, and safe electronic connections with banks.
What cost savings can customers achieve by using ICLs?
Cost savings include:
* Consolidation of operations
* Consolidation of reconciliation
* Larger balances in a centralized account
* Elimination of multiple accounts and the need to concentrate funds.
Define a check
A check is defined as a negotiable instrument under both Regulation CC and the UCC.
What is a cashier check?
Cashier checks are drawn on a bank and are a direct obligation of the bank.
Eligible for image exchange or to create a substitute check
What is a cashier check?
A check drawn on a bank, where the bank is both drawer and drawee
It is signed by an officer/employee of the bank on behalf of the bank.
What must be filed if a cashier’s check is lost or stolen?
A declaration of loss
The declarer must be the remitter or payee of the check and the loss must not be a result of transfer or lawful seizure.
When is a filed claim enforceable for a lost cashier’s check?
At the later of the time the claim is asserted or 90th day following the issue date of the check
Timeframe may vary by state law.
What is the benefit of waiting 90 days before enforcing a claim on a cashier’s check?
To protect the financial institution holding the liability to pay the check
The obligation to pay lies with the institution, not the claimant.
What are the three conditions for a claimant to make a claim on a cashier’s check within three years?
- Claimant must be the payee or remitter
- Claim includes a declaration of loss
- Claim must be received in time for the bank to act
The declaration of loss must be made under penalty of perjury.
What does ‘declaration of loss’ mean?
A statement made under penalty of perjury that the cashier’s check was lost
It must indicate that the check was not transferred or lawfully seized.
What are common uses for cashier checks?
Payments that must be credited immediately upon receipt, such as:
* Business payments
* Real estate transfers
* Tax payments
Cashier checks are often used for transactions requiring immediate credit.
Can an alteration claim be made on a cashier’s check under the UCC?
No
Transfer and presentment warranties do not apply to cashier’s checks.
Can payment be stopped on a cashier’s check?
Generally no, but payment may be refused under certain circumstances
UCC §3-411 allows for penalties for wrongful refusal to pay a cashier’s check.
What is a Certified Check?
An ordinary check presented by the drawer to the paying bank for certification
Certified by the bank officer’s signature, confirming the drawer’s signature is genuine and funds are set aside to pay the check.
How is a Certified Check certified?
By the signature of an officer or authorized employee of the bank
It verifies the genuineness of the drawer’s signature and that funds are available.
Is a Certified Check frequently used today?
No
Its usage has declined over time.
What is a Government check?
Instruments payable on demand and drawn by the U.S. government on itself
Generally regarded as checks, though not drawn on a bank.
What is a Money order?
A draft that a person may purchase from a financial institution, post office, or sales agent to pay a debt or transfer funds
Useful for secure payments without needing a bank account.
What defines a Traveler’s check?
Payable on demand and requires a countersignature by the person whose specimen signature appears on the instrument
Designated by the term ‘Traveler’s check’ or similar.
What is a Payable-Through draft?
Drawn on the issuer, not the bank, merely designates the bank to present the draft for payment
It is not an order to the payable through bank to pay the instrument.
What is a Warrant?
Issued by state or local government agencies and treated as checks if payable on demand
Many are actually payable-through drafts, while registered warrants are not IOUs.
What is a Remotely Created Check (RCC)?
A check authorized by the holder of a checking account but not signed by them
Also known as unsigned drafts, defined in Reg CC §229.2(fff).
What conditions must an RCC meet to be valid under current check law?
It must exist in paper form
This ensures it complies with legal standards.
What are legitimate commercial uses of RCCs?
- Pre-authorized drafts to pay creditors
- ACH administrative returns
- Purchase items via telephone or internet
- Depository transfer checks
- Collect return check fees
These uses highlight the flexibility of RCCs in transactions.
What are potential risks associated with RCCs?
Abuse and fraud
Regulatory guidance has been issued for managing risks related to RCCs.
What must banks and customers do to manage the risks of RCCs?
Know your customer
This practice helps in identifying and mitigating potential fraud.
What is a substitute check?
A negotiable instrument created by the Check 21 Act that is the legal equivalent of the original item for all purposes.
See part F. Regulatory Environment, 2. Regulation CC in this Section 1 for more detail on the substitute check.
What is a teller’s check?
A check drawn by a bank on another bank, including checks payable at or through a bank.
Also includes checks drawn on a nonbank, as long as the check is payable through or at a bank.
What are common uses for teller’s checks?
Checks provided to customers for account disbursement or interest payments; checks acquired by non-customers for remittance purposes such as certain loan disbursement checks.
What is a noncash item according to Reg CC §229.2(u)?
An item that would otherwise be a check, except that a passbook, certificate, or other document is attached.
This includes items accompanied by special instructions or consisting of more than a single thickness of paper.
What are the exceptions for noncash items regarding automated check processing?
A check that qualifies for handling by automated check processing equipment.
What characteristics define a noncash item?
- Attached passbook or certificate
- Accompanied by special instructions
- More than a single thickness of paper
- Not preprinted or post-encoded in magnetic ink with the routing number
- Foreign item
True or False: A substitute check is not considered a legal equivalent of the original item.
False
Fill in the blank: A properly prepared substitute check is the legal equivalent of the _______.
original item
What is Remote Deposit Capture (RDC)?
RDC is a system that allows customers to truncate the paper check, scan the check remotely, and transmit the check images to the depositary bank for account credit.
How does the depositary bank process the check image received from the customer?
The depositary bank posts the deposit to the customer’s account and makes the funds available based on the customer’s availability schedule.
What are alternative names for Remote Deposit Capture?
- Corporate capture/merchant capture
- Image deposit
- Mobile deposit
What are some benefits of RDC for corporate customers and merchants?
- Accelerated clearings and better deposit availability
- Convenience and reduced transportation time/costs
- Enhanced cash flow
- Reduced return item risk
- Processing efficiencies
- Potential for consolidating banking relationships
What are some benefits of RDC for financial institutions?
- Reduced transportation costs
- Opportunities to expand customer footprint and increase/consolidate existing customers’ business
- Ability to offer new products
- Increased processing efficiencies
What basic requirements must a customer meet to utilize RDC?
- A PC
- An internet connection
- A check scanner and/or access via a service provider
- A deposit account with a depository bank
What is mobile RDC (mRDC)?
mRDC is a version of RDC offered via an approved app on a mobile device, which may be standalone or integrated into existing mobile banking applications.
True or False: The risks associated with mobile RDC are different from those associated with deposits made through a branch or ATM.
False
What is a potential risk associated with mobile RDC?
The potential for presenting duplicate items when the original check is subsequently deposited or cashed.
Which warranties protect against duplicate presentations in RDC?
- ECCHO Operating Rules
- Regulation CC
- Federal Reserve Operating Circular 3 (OC 3)
- Regulation J
What should financial institutions have to mitigate risks associated with RDC?
Specific RDC customer agreements following the latest FFIEC guidance.
What do RDC agreements allow banks to do regarding risks?
Pass back risks to the customer that are outside of the financial institution’s control.
What are some procedures and policies financial institutions should implement for RDC?
- Follow Know Your Customer guidelines
- Establish teller procedures to examine checks for stale dates and stamps
- Utilize technology for duplicate detection to diminish risk
Fill in the blank: The largest risk associated with RDC is the potential for presenting _______.
duplicate items
Figure 2.23 illustrates a basic remote deposit capture and transmission process from
a consumer that scans a check and makes a mobile deposit to the depositary bank or
bank of first deposit (BOFD)
What does ACH Check Conversion offer?
Products that a bank can offer their customers for converting eligible checks to ACH SEC codes
Includes ARC, POP, and BOC codes.
What does the SEC code ARC stand for?
Accounts Receivable Entry
Part of ACH Check Conversion.
What does the SEC code POP stand for?
Point-of-Purchase Entry
Part of ACH Check Conversion.
What does the SEC code BOC stand for?
Back Office Conversion Entry
Part of ACH Check Conversion.
What is Balance Reporting in Cash Management Products?
Secure, internet-based reporting of account and transaction information at a customer’s lead bank
May include balances in foreign currencies and cash positions.
What is Zero Balance Accounting designed for?
Customers who fund decentralized accounts from a central main account
Funds automatically transfer to cover debits.
What is a Lockbox in Receivable Processing?
A cash management service offered by banks to expedite receivables processing
Involves setting up a post office box for checks.
What is a Retail Lockbox?
A lockbox service for companies, such as utilities, that receive a high volume of payments via checks in the mail
May include checks and remit advice processed in an automated way.
What is a Wholesale Lockbox?
A lockbox service for companies with small numbers of payments, such as a doctor’s office
Supports non-standard forms and detailed processing requirements.
What are ACH Disbursements?
Scheduling recurring payments through the ACH system for dividends, interest, pensions, or direct payroll deposit
Part of disbursements in cash management.
What is the origin of Account Reconciliation Products (ARP)?
Product dates to when banks first offered bank statement reconciliation
What was initially offered by banks in relation to ARP?
Fully reconciled statement of checks paid and deposits made
How often are ARP services typically scheduled?
Daily, weekly, or monthly as defined by the customer
What is the primary goal of ARP products?
Increase amount of information and decrease amount of work in company’s accounting
What type of reporting does ARP services provide?
Wide range of reporting/access to reports through automated means
Describe Full Reconciliation in ARP services.
Customer provides data on checks issued; bank matches against cleared checks; customer receives reconciliation reports
What does Partial Reconciliation provide?
Report of items paid sorted usually by the customer’s instructions
What is Deposit Reconciliation?
Allows customer to maintain one account but have deposits from multiple business locations
What is Positive Pay in ARP services?
Service where the bank matches each check presented against amount and check number on listing of checks issued
What is Payee Positive Pay?
Service that matches the payee name from the issue file to the payee name on the check
What are the benefits of Payee Positive Pay?
Bank reviews and flags potentially fraudulent checks and alerts the customer
What is Reverse Positive Pay?
Service where the bank sends information on checks to be posted for customer comparison
What benefits does Reverse Positive Pay offer?
Customer can monitor and review checks, deciding whether to pay or reject them
What is Controlled Disbursement?
Daily report detailing the amount of disbursements that will be charged to the account
What types of payments can Controlled Disbursement help settle?
Trade payment, payrolls, dividends, and other disbursements
What is the concept of float in banking?
Lag of days between initiation of a payment and actual debit to the customer’s bank account
What are various types of float?
- Mail float
- Clearing float
What is a key advantage of Controlled Disbursement regarding funding?
Allows customers to fund their account only when the check posts
What are the benefits of Controlled Disbursement?
- Timely notification of daily funds needed
- Reporting of funds transferred
- Reduction of idle balances
- Increased interest income from short term borrowing
- Reduced borrowing costs
What regulatory change required the Federal Reserve Bank to reduce or charge for float?
Monetary Control Act of 1980
What are some changes that have impacted Controlled Disbursement over the years?
- RCPC – Regional Check Processing Centers
- Federal Reserve High Dollar Group Sort (HDGS)
- Same Day settlement
- Day Light Overdraft pricing
- ECP and MICR line presentment
- FRB office closings
- Image Exchange
True or False: Controlled Disbursement services are now primarily bought for the control of knowing the amount to fund each day.
True
What is the commonly used definition of an image cash letter?
Image cash letter (ICL): File containing digital images of paper cash letter, including both the MICR data record and check images, which is electronically transmitted from sending bank to receiving bank.
What items are eligible for image exchange under an image cash letter?
Items eligible for image exchange generally include any item defined as a check under Reg CC and an item under UCC.
What factors can affect eligibility for image exchange?
Eligibility can differ based on the channel of exchange and applicable rules.
What are some presentment point options available to receive ICLs?
- Correspondent bank
- Clearing House
- Direct presentment
- Federal Reserve bank
True or False: Image cash letters can only be created for presentment of checks.
False - can also be called an “Item” under UCC
Fill in the blank: An image cash letter includes both the _______ data record and check images.
[MICR]
What does MICR stand for in the context of image cash letters?
Magnetic Ink Character Recognition
What is the role of the sending bank in the image cash letter process?
The sending bank electronically transmits the ICL to the receiving bank.
What is a cashier’s check?
Check that a bank draws on itself
A cashier’s check is a direct obligation of the bank, typically used for remittance purposes.
Who is both the drawer and drawee in a cashier’s check?
The bank
The bank issues the check and is responsible for payment.
Who signs a cashier’s check?
An officer or employee of the bank on behalf of the bank as drawer
This signature indicates the bank’s commitment to pay the check.
What are common uses for a cashier’s check?
Payments that must be credited immediately upon receipt, such as:
* Real estate transfers
* Tax payments
Cashier’s checks are often used in transactions where immediate availability of funds is crucial.
What is a government check?
Instrument payable on demand and drawn by U.S. government on government itself
Government checks are considered checks even though they are not drawn on a bank.
What is a money order?
Draft that a person may purchase from financial institution, post office or sales agent to pay a debt or transfer funds
Money orders serve as a secure method for transferring money.
What is a remotely created check?
Holder of account authorizes payee to draw check on account but does not sign check
This type of check relies on the authorization from the account holder.
What is a substitute check?
Negotiable instrument created by Check 21 Act
A properly prepared substitute check is a legal equivalent of the original item for all purposes.
True or False: A substitute check is not legally equivalent to the original check.
False
Substitute checks are recognized as legal equivalents under the Check 21 Act.
What is positive pay?
A fraud deterrent product that matches each check presented against a list of checks issued.
Positive pay is commonly used by businesses to prevent unauthorized checks from being cashed.
What does Payee Positive Pay do?
Matches payee name from the issue file to payee name on the check.
This service helps ensure that only the intended recipient can cash the check.
What is Reverse Positive Pay?
A service where the bank sends a file to the company, which compares the information to its internal records.
This allows companies to verify checks before they are processed.
What is Account Reconciliation (ARP)?
Includes a range of reconciliation products, including positive pay type services.
ARP helps organizations manage their financial accounts and ensure accuracy.
What additional service do banks offer related to check images?
Banks offer the ability to provide customers with check images via CD.
This service is useful for customers with large volumes of checks, making retrieval easier and eliminating the need to store paper checks.
What are the benefits of using check images provided by banks?
Eliminates need to store paper checks and deduces difficulty in retrieving checks for research.
This helps businesses maintain better organization and efficiency.
What is controlled disbursement?
Controlled disbursement is a bank product that provides customers with information early each day of the total amount of checks that will clear.
What opportunity does controlled disbursement provide to customers?
The opportunity to fund their account for the actual amount of checks posted that day.
What is one benefit of controlled disbursement?
Early notification of day’s funding requirement to eliminate idle balances.
How can customers utilize surplus funds with controlled disbursement?
Customers can invest surplus funds or obtain additional funds, if needed.
When are money markets generally more attractive for investment rates?
In the morning.
How do short term investment rates generally behave by late morning?
Short term investment rates generally move downward.
What is an Accounts Receivable Entry (ARC)?
Single entry ACH debit initiated by an Originator to the account of a Receiver based on an eligible source document
May convert check in the amount of $25,000 or less; only business checks that do not contain aux on-us field; Originator retains the check.
What is the maximum amount for a check that can be converted using ARC?
$25,000
Only applicable for checks that do not contain aux on-us field.
What does BOC stand for?
Bank Office Conversion Entry
Single entry ACH debit for non-recurring in-person payments.
Describe the process involved in a Bank Office Conversion Entry (BOC).
Check accepted at point-of-purchase is converted to ACH debit during back-office processing; Originator retains check for processing.
Used for non-recurring payments.
What is a Point-of-Purchase Entry (POP)?
Used to initiate a one-time ACH debit entry to a Receiver’s account for in-person purchases made at point of purchase
Based on written authorization and account information from source document (check); check returned to customer.
What type of authorization is required for a Point-of-Purchase Entry (POP)?
Written authorization
Account information must come from a source document (check).
True or False: The Originator retains the check in a Bank Office Conversion Entry (BOC).
True
The check is processed in the back office.
Fill in the blank: A Bank Office Conversion Entry (BOC) is used for _______ payments.
non-recurring
Payments must be in-person.
What happens to the check in a Point-of-Purchase Entry (POP)?
Check returned to customer
This is part of the in-person purchase process.
What is Positive Pay?
Service where bank automatically matches each check presented against amount and check number on list of checks issued.
What are the types of Positive Pay?
- Payee Positive Pay
- Reverse Positive Pay
What is Payee Positive Pay?
Matches the Payee name from the issue file to the payee name on the check.
What is Reverse Positive Pay?
Bank sends information on checks to be posted to customer to be compared (amount and check number) to its listing of checks issued.
What are the benefits of Positive Pay?
- Products are useful as fraud deterrents
- Customer can monitor and review checks
- Customer can tell the bank whether to pay or reject checks
- Some products may allow customer to adjust/correct check amount if value was misread.
What is a Zero Balance Account (ZBA)?
Service that as debits are charged to the account, funds automatically transfer from the master account to cover and bring the sub-account balance to zero.
What are other names for a Zero Balance Account?
- Sweep Account
- Target Balance Account
What are the benefits of a Zero Balance Account?
- Designed for customers who fund decentralized accounts from a central main account
- Provides ability to maintain separate accounts for accounting controls
- Streamlines account management to single balance
- Customer can easily make daily investment, purchase, or payment decisions.
What is a Lockbox?
Service designed to provide customer with efficient way to accept payments and deposit funds received into the financial institution as early as possible.
What are the two types of Lockbox services?
- Retail Lockbox
- Wholesale Lockbox
What characterizes a Retail Lockbox?
Characterized by large volume with machine readable payment coupons; relatively low dollar payments.
What are examples of Retail Lockbox payments?
- Utilities
- Installment Loans
- Insurance Premiums
What characterizes a Wholesale Lockbox?
Characterized by lower volume and relatively high dollar payments, often including no payment coupon.
What are examples of Wholesale Lockbox payments?
- Dealer Payments
- Medical Billing
- Invoices
What are the benefits of using a Lockbox?
- Allows the customer to avoid or reduce staff, equipment and transportation costs
- Ensures the funds are deposited into the account(s) as early as possible.
