Confusion continues over new check endorsing rules mandated by Congress and scheduled to take effect in less than two weeks.
The latest twist happened last week when the Federal Reserve System issued a special bulletin saying local banks have misinterpreted the new regulations. The announcement came after the Utah Banker's Association spent more than $2,000 on a campaign to help banks inform their customers and local businesses on changes in check endorsing standards.While the UBA warned local merchants that they will have to make some changes in how they endorse checks or else risk account losses, the Fed notice said the endorsement changes only apply specifically to banks and not to the general public.
"The standard does not impose specific requirements on payee endorsements or on bank customers issuing checks. Furthermore, there are no penalties for failure to meet the endorsement standards," the notice said.
The notice also relaxed the Sept. 1 deadline to implement the changes, saying coordinating endorsement policies between a bank and its customers are "longer-term initiatives."
The announcement has been received with mixed emotions by the UBA and local merchants scrambling to meet the Sept. 1 deadline.
"I think the Fed may have been caught with their pants down on this one," said UBA executive vice president Lawrence Alder, who will be helping local banks doing some backpedaling of their own to clear up the confusion.
"It looks great and we are excited about it," said Boyd Ware, manager of the downtown Deseret Book store and president of the Downtown Retail Merchants Association. "But we will need some time to look through this thing with our local banks and see what the bulletin really says."
Congress approved the endorsing standards last year as part of the Expedited Funds Availability Act - designed to speed up the way checks are processed and ensure prompt credit to bank customers' accounts. The Regulation CC endorsement procedures would clear away the montage of stamps on the bank of checks, allowing banks to easily identify the initial depository institution and speed up the return of checks, particularly bad ones.
The Utah Bankers Association printed up more than 500,000 slick brochures explaining that Regulation CC would require depositors to limit endorsements to a 1 1/2 inch space on the left end on the back of the check, leaving an unmarked space for the bank endorsement and a large 3-inch area for other endorsements. By not complying with the 11/2 inch area of endorsement, depositors could risk a loss of funds. The brochure also stressed the law's Sept. 1 deadline.
Ware and other local retailers were alarmed by the change, saying it could cost them thousands of dollars to modify equipment and train employees in less than one month to conform to limited endorsing space.
But the new Fed notice said only the bank's endorsement is limited to a specific area on the back of the check, and bank customers could endorse the check anywhere. The notice also cleared up reports of stiff penalties for those not conforming to the endorsement changes.
"There has been a great deal of confusion about the consequences of not endorsing checks in accordance with the standard," the Fed notice said, noting that some institutions around the country plan not accept checks without proper endorsement and access special fees to those not complying with the endorsing standards.
Other institutions planned on having customers sign indeminification notices because of the potential risk associated with an unpaid check being returned untimely, the Fed said.
Alder said Utah banks have not enforced any penalties, but some institutions may consider agreements with their customers to relieve the bank of any liability if sloppy endorsements prevent the check from clearing within the regulated time.
Asked if the Fed was caught off guard by complaints from retailers across the country over the deadline and the endorsement rules, a local Fed official said the misunderstanding was not anticipated and the notice was issued to prevent extra legislation to correct the confusion.
Gerald Dalling, a vice president at the Salt Lake Branch of the Federal Reserve Bank of San Francisco, said the confusion over who endorses a check where arises from the tradition of depositors endorsing checks on the left hand end of the back of the check.
He explained that instructional material the Fed sent to train banking officials about Regulation CC, recommended that the tradition continue because it would help implement the endorsement procedures. But the Fed's latest announcement notes that the law itself doesn't require that the depositors' endorsement be placed within the 1 1/2-inch area on the left end of the check.
Dalling said depositors could put their endorsement in the three inch area to the right of the required bank endorsement.
Although the Fed notice clearly states Regulation CC doesn't impose requirements on bank customers, it urges banks and their depositors to ensure checks are clearly and properly endorsed so that checks can be processed quickly.
Alder said it will be up to individual institutions to work with their customers in establishing endorsement procedures.