As more and more community banks and credit unions are offering mobile deposits (also known as consumer remote deposit capture), it is important for these financial institutions to understand the rules that govern mobile deposits and how this affect their liability under applicable regulations. One of the main elements to understand is how a mobile deposit endorsement will affect the liability of the financial institution in regards to checks that are deposited twice; once through mobile deposit and then a second time (usually at another financial institution) with the paper check.
Overview of Mobile Deposit Endorsement Rules
For years now, mobile deposits have carried some risk due to the outdated rules of Regulation CC. In the past, liability (or the indemnity) for a check that was deposited twice - once by mobile deposit and once by depositing the paper check - would fall on the bank that accepted the mobile deposit. In other words, if a customer were to deposit a check at your institution through mobile deposit, but then take the paper check and deposit it at another bank or credit union, your financial institution would be stuck with the short straw, trying to get your money back from the customer due to the duplicate deposit.
Fortunately for financial institutions, the Federal Reserve decided to amend their out-of-date rules to address mobile deposits, also know as remote deposited checks. The amendments to Regulation CC go into effect on July 1, 2018 and will provide clarification on what is required under Regulation CC for mobile deposit endorsements and explains who has liability in cases of duplicate check deposits where one deposit was by remote deposit capture..
Restrictive Endorsements and Mobile Deposits
The Federal Reserve has revised Regulation CC so that financial institutions accepting deposits through mobile deposit have protection if they use a “restrictive indorsement.” Basically, if an endorsement on a RDC deposit is done in a way to prevent duplicate deposits, the financial institution that accepted the RDC deposit cannot have an indemnity claim filed against them from the depository bank that accepted the duplicate original (paper) check.
Specifically, part 229.34(f)(3) of Regulation CC states the following:
(3) A depositary bank may not make an indemnity claim under paragraph (f)(2) of this section if the original check it accepted for deposit bore a restrictive indorsement inconsistent with the means of deposit.
In other words, the RDC bank cannot be held liable for duplicate checks if they required the depositor to endorse the check in a way that would prevent duplicate check. The commentary to Regulation CC expands upon this:
"The Board believes that the indemnity places appropriate incentives on the parties best positioned to prevent multiple deposits of the same item and has adopted the proposed indemnity. Based on comments received, the Board has added an exception to the indemnity that would prevent an indemnified bank from making an indemnity claim if it accepted an original check containing a restrictive indorsement that is inconsistent with the means of deposit, such as “for mobile deposit only.”
While the rules don’t provide exact language that should be used for a “restrictive endorsement,” the commentary uses the examples of “for mobile deposit only” and “for mobile deposit at Depository Bank A only.”
Examples of Restrictive Endorsements for Mobile Deposits
In addition to the information found in the regulation itself, the commentary to Regulation CC provides three examples to help financial institutions understand the liability requirements for mobile deposits. The following examples are taken right out of the commentary to Regulation CC.
a. Depositary Bank A offers its customers a remote deposit capture service that permits customers to take pictures of the front and back of their checks and send the image to the bank for deposit. Depositary Bank A accepts an image of the check from its customer and sends an electronic check for collection to Paying Bank. Paying Bank, in turn, pays the check. Depositary Bank A receives settlement for the check. The same customer who sent Depositary Bank A the electronic image of the check then deposits the original check in Depositary Bank B. There is no restrictive indorsement on the check. Depositary Bank B sends the original check (or a substitute check or electronic check) for collection and makes funds from the deposited check available to its customer. The customer withdraws the funds. Paying Bank returns the check to Depositary Bank B indicating that the check already had been paid. Depositary Bank B may be unable to charge back funds from its customer’s account. Depositary Bank B may make an indemnity claim against Depositary Bank A for the amount of the funds Depositary Bank B is unable to recover from its customer.
b. The facts are the same as above with respect to Depositary Bank A and B; however, the original check deposited in Depositary Bank B bears a restrictive indorsement “for mobile deposit at Depositary Bank A only” and the customer’s account number at Depositary Bank A. Depositary Bank B may not make an indemnity claim against Depositary Bank A because Depositary Bank B accepted the original check bearing a restrictive indorsement inconsistent with the means of deposit.
c. The facts are the same as above with respect to Depositary Bank A; however, Depositary Bank B also offers a remote deposit capture service to its customer. The customer uses Depositary Bank B’s remote deposit capture service to send an electronic image of the front and back of the check, after sending the same image to Depositary Bank A. The customer deposits the original check into Depositary Bank C without a restrictive indorsement. Paying Bank pays the check based on the image presented by Depositary Bank A, and Depositary Bank A receives settlement for the check without the check being returned unpaid to it. Paying Bank returns the checks presented by Depositary Bank B and Depositary Bank C. Neither Depositary Bank B nor Depositary Bank C can recover the funds from the deposited check from the customer. Depositary Bank B does not have an indemnity claim against Depositary Bank A because Depositary Bank B did not receive the original check for deposit. Depositary Bank C, however, would be able to bring an indemnity claim against Depositary Bank A.