Policy Statement on Delayed Disbursement

DELAYED DISBURSEMENT OF TELLER'S CHECKS AND CASHIER'S CHECKS

Effective October 1, 1999

9-750

GENERAL POLICY

Delayed disbursement (sometimes referred to as “remote” disbursement) is the practice of issuing checks that are payable by, through, or at a bank¹ located in a geographic area such that collection of the checks is generally delayed. For example, these arrangements may be designed to delay the collection and payment of checks by drawing checks on banks located substantial distances from the payee or outside of Federal Reserve cities when alternate and more efficient payment arrangements are available.

The Board is concerned that delayed-disbursement practices reduce the efficiency of the check-collection system. Drawing a check on a bank remote from the payee often increases the costs of handling the check. More institutions are likely to handle the check before it is finally paid, increasing processing costs, and higher transportation costs are incurred to move checks greater distances. In addition, delays in collection time can impose float costs on depositary banks. Furthermore, delayed-disbursement practices delay the return of unpaid checks, increasing the possibilities for check fraud and other losses.

The Board believes the banking industry has a public responsibility not to design, offer, promote, or otherwise encourage the use of a service that is intended to delay payment and that exposes payment recipients and depositary banks to greater-than-ordinary risks. The Board urges the nation’s banks and check-related service providers to eliminate delayed-disbursement practices intended to obtain extended float.

There is no intention to discourage corporate disbursement arrangements with banks that provide for improved control over daily cash requirements, provided that these arrangements do not result in the undesirable effects noted above. Banks should provide the cash-management services needed by their customers through the use of payments methods that facilitate prompt funds availability to payment recipients and that protect banks from unnecessary risk.

As used in this policy statement, the term “bank” includes all depository institutions, such as commercial banks, savings and loan associations, and credit unions. A depositary bank is the first bank to which a check is transferred. A paying bank is a bank by, at, or through which a check is payable and to which it is sent for collection.

9-751

DELAYED DISBURSEMENT OF TELLER’S CHECKS AND CASHIER’S CHECKS

Although many classes of checks are subject to delayed disbursement, the effects of delayed disbursement are particularly significant in the case of teller’s checks and cashier’s checks.² In addition to increased transportation costs, the delayed disbursement of teller’s checks and cashier’s checks imposes float costs on the depositary bank, which must generally make the proceeds of these checks available for withdrawal on the business day following deposit.

The Expedited Funds Availability Act and Regulation CC require a depositary bank to provide customers with next-day availability, under specified conditions, for certain checks deposited in transaction accounts, including cashier’s checks and teller’s checks. Depending on the location of the paying bank, a depositary bank may not receive credit for the check by the time funds must be made available to the customer for withdrawal. Thus, the practice of delayed disbursement permits a bank issuing such checks to impose costs, in terms of lost interest, on other banks and to benefit from interest or earnings credits earned on outstanding checks until the checks are presented for payment.

The Board recognizes that many banks that issue teller’s checks benefit from the specialization and economies of scale of certain banks and other service providers that can perform the tracking, reconciliation, and payment services associated with teller’s checks at a lower cost than the issuing bank would incur by issuing and paying cashier’s checks. In addressing the delayed-disbursement problem, the Board believes that it is desirable to reduce the float created by the issuance of these checks while minimizing the disruption of efficient teller’s-check services.

As a general matter, the Board believes that a depositary bank located in the same community as the bank that issues a teller’s check should be able to receive next-day credit for the teller’s check. The Board has determined, after review of Federal Reserve collection patterns and deposit deadlines across the country, that depositary banks in most areas generally can receive next-day credit for checks that are encoded with a nonlocal-city routing number³ and presented in a nonlocal Federal Reserve city. For checks that are encoded with a nonlocal RCPC or country routing number and presented in a nonlocal check-processing region, credit is generally deferred by one or two days. The Board recognizes, however, that depositary banks located on the west coast generally may not be able to receive next-day availability for checks presented in most nonlocal cities. In addition, in other isolated areas of the country, next-day credit is generally not available for any check payable by a nonlocal paying bank. The Board recognizes that banks in these areas may benefit by having access to a centralized teller’s-check service provider.

The Board believes that banks issuing teller’s checks and teller’s-check service providers should take steps to ensure that delays in the collection and return of teller’s checks are kept to a minimum. First, the Board believes that any disbursement practice designed to extend the time needed to collect a teller’s check is inappropriate. Although the Board believes that centralized disbursement is economically efficient in some cases, the location of the paying bank should be chosen so as to minimize collection time.

Second, the Board has determined that depositary banks can generally receive credit faster for checks payable by a bank with a city routing number than for checks payable by a bank with an RCPC or country routing number. The Board believes that teller’s check service providers that serve issuing banks in check-processing regions that are nonlocal to the paying bank should help speed the collection and return of teller’s checks by use of a city presentment point and a city routing number in the MICR line of its teller’s checks.

Some teller’s-check service providers confine the scope of their services to a state or other limited geographic area. Because the state or area may be divided into more than one check-processing region, such service providers may use a paying bank that is nonlocal to many of their customer banks. In addition, the state or area may contain no Federal Reserve city. The Board recognizes that it may be impractical for such service providers to use a city presentment point.

Third, the Board believes that those teller’s-check service providers that serve banks nationwide should accept teller’s checks at more than one presentment point, particularly those providers that serve west coast banks. For example, a teller’s-check service provider that uses an east coast paying bank could shorten collection and return times for its California customers by also providing a west coast presentment point for teller’s checks.

The Board recognizes that similar delayed-disbursement problems arise in connection with cashier’s checks, issued by a bank with multistate branches, that depositary banks must send to a central location for payment. The Board believes that the same general guidelines should apply to the disbursement of cashier’s checks as apply to teller’s checks and will take further action regarding cashier’s checks should abusive delayed-disbursement practices occur.

The Board will monitor the industry’s adherence to the policy statement and delayed-disbursement practices in general and, should abuses continue, will consider appropriate further action.

A “teller’s check” is a check provided to a customer of a bank, or acquired from a bank for remittance purposes, that is drawn by the bank and drawn on another bank or payable through or at another bank. For the purposes of this policy statement, “teller’s check” includes checks drawn on a Federal Reserve Bank or a Federal Home Loan Bank. A “cashier’s check” is a check provided to a customer of a bank, or acquired from a bank for remittance purposes, that is drawn on the bank, is signed by an officer or employee of the bank on behalf of the bank as drawer, and is a direct obligation of the bank.

These checks are payable by banks located in the same city as a Federal Reserve office. RCPC (regional check-processing center) checks are payable by banks outside Federal Reserve cities. Certain Federal Reserve regions also contain country zones, which are generally more remote from Federal Reserve cities than are RCPC zones.