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Restrictive Endorsements Assume Greater Import with Pending Reg CC Changes

Wednesday, September 13, 2017 ( / Patti Murphy)

Restrictive endorsements along with solutions that can identify those endorsements should top to-do list as financial institutions prepare for upcoming Reg CC amendments.
Pending amendments to Federal Reserve Regulation CC should be prompting more financial institutions to rethink policies and customer agreements regarding remote deposit capture. Requiring restrictive endorsements, and implementing solutions capable of scanning the backs of checks to verify those restrictive endorsements, are crucial considerations for FIs in preparing for the new amendments, which take effect July 1, 2018.
The Fed in June announced several amendments to Regulation CC, the regulatory framework that implements the Expedited Funds Availability and Check 21 Acts, including one that specifically addresses duplicate deposits. That amendment stipulates that a financial institution accepting a remotely deposited check indemnifies any FI that later receives the original (paper) check for losses from paying the check, plus legal fees and other associated expenses. The indemnity does not apply, however, in situations where the original check contains a restrictive endorsement, such as “for mobile deposit.”
A recent analysis of the pending amendments, prepared by the national law firm Dykema Cox Smith, warns this amendment “creates a new form of risk” FIs need to contain. “Financial institutions should review and revise all of their customer-facing agreements that have RDC provisions – consumer and business, mobile and cash management – to require financial institution customers to include restrictive endorsements on each RDC item the customer deposits, and to allocate liability for loss regarding RDC items to the customer in connection with subsequent deposits of the same item,” Dykema attorneys specializing in FI regulation wrote.
Simply requiring restrictive endorsements will not suffice, however. Enforcement is critical: checking every RDC item and rejecting any that do not contain restrictive endorsements. “The most obvious way for a financial institution to do this is to have their RDC vendor enable optical scanning of the back of each item for a restrictive endorsement,” the attorneys wrote. “If the back of the item does not contain an appropriate restrictive endorsement, the RDC software should be programmed to reject the deposit. This process would serve as a defense to any indemnification claim from a financial institution.”
Restrictive endorsements are required by some FIs offering RDC today, and RDC solutions are available that can verify the existence of restrictive endorsements on deposited checks. But data compiled by suggests many FIs will need to start working with vendors on implementing this capability soon, if they want to defend against indemnification claims for duplicate deposits beginning next July. Preliminary results of the mRDC Industry Study reveal that only about half of FIs today can identify the presence of an endorsement on deposited checks without the need for human intervention.
“Restrictive endorsements and technologies that can verify restrictive endorsements should be a top priority for FIs offering RDC. It can not only help to prevent duplicates, it can also shield that FI from liability when duplicates do happen,” said John Leekley, Founder and CEO of Leekley will be discussing trends in duplicate deposits and mobile RDC during a September 20 webinar featuring results of the 2017 mRDC Industry Study. Click here to learn more about and register for the webinar.  
Restrictive endorsements, while important, represent only one facet of RDC risk management, however, as Leekley detailed in a webinar last month. That webinar – RDC Risk Management 2017: An Updated Approach – takes a deep dive into RDC adoption, risks and risk management strategies – and is available for viewing on demand at the webinar library. Click here for details now and to view this insightful webinar.


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