PREP Guide - Warranties and Indemnification

Question 1

What does Reg CC §229.34(c)(2) establish?

Answer 1

Transfer warranties related to the settlement amount and encoding of checks exchanged between banks.

Question 2

What is theTransfer Settlement Amount Warranty (§229.34(c)(2))?

Answer 2

The bank transferring a check warrants to the transferee bank that the accompanying information accurately reflects the total amount of checks transferred.

Question 3

What is the purpose of the Transfer Settlement Amount Warranty?

Answer 3

To ensure that the receiving bank can trust the total amount presented for settlement, preventing discrepancies in financial transactions.

Question 4

To whom does the Transfer Settlement Amount Warranty apply?

Answer 4

Interbank transactions only.

Question 5

What is theTransfer Encoding Warranty (§229.34(c)(3))?

Answer 5

The bank transferring a check warrants to any subsequent bank handling the check that the information encoded on the check after issuance is accurate.

Question 6

What is the purpose of the Transfer Encoding Warranty?

Answer 6

To ensure that the MICR line and other encoded data remain correct throughout the check’s processing lifecycle.

Question 7

To whom does the Transfer Encoding Warranty apply?

Answer 7

Interbank transactions only.

Question 8

Scenario: Bank A transfers a batch of checks to Bank B for clearing. The total settlement amount is $500,000, but due to an encoding error, one check was incorrectly recorded as $5,000 instead of $50,000.

What is the violation and outcome?

Answer 8

Violation: Bank A breached the encoding warranty (§229.34(c)(3)) because the encoded amount was incorrect.

Outcome: Bank A is liable for the discrepancy and must correct the error or indemnify Bank B for any resulting losses.

Question 9

What does Regulation CC §229.34(c)(1) establish?

Answer 9

Presentment warranties related to the settlement amount and encoding of checks exchanged between banks

These warranties ensure that financial institutions can rely on the accuracy of the presented amount and encoded data.

Question 10

What is the Presentment Settlement Amount Warranty (§229.34(c)(1))?

Answer 10

The bank presenting a check warrants that the total amount presented equals the total amount requested for settlement

This warranty ensures that the paying bank is charged the correct amount and prevents discrepancies.

Question 11

What is the purpose of the Presentment Settlement Amount Warranty?

Answer 11

To ensure the paying bank is charged the correct amount and prevent discrepancies in financial transactions

Question 12

To whom does the Presentment Settlement Amount Warranty apply?

Answer 12

Interbank transactions only

Question 13

What does the Presentment Encoding Warranty (§229.34(c)(3)) entail?

Answer 13

The bank presenting a check warrants that the information encoded on the check after issuance is accurate

Question 14

What is the purpose of the Presentment Encoding Warranty?

Answer 14

To ensure that the MICR line and other encoded data remain correct throughout the check’s processing lifecycle

Question 15

To whom does the Presentment Encoding Warranty apply?

Answer 15

Interbank transactions only

Question 16

Fill in the blank: The bank presenting a check warrants that the total amount presented equals the total amount requested for _______.

Answer 16

settlement

Question 17

True or False: The Presentment Encoding Warranty extends to customers or businesses depositing checks.

Answer 17

False

Question 18

What does Reg CC §229.34(b) establish for remotely created checks (RCCs)?

Answer 18

Transfer and presentment warranties

These warranties ensure banks can rely on the authenticity of RCCs, specifically regarding authorization by the account holder.

Question 19

What is the description of the Transfer Warranty for RCCs?

Answer 19

A bank warrants to the transferee bank, any subsequent collecting bank, and the paying bank that the check was authorized by the account holder in the amount stated and payable to the correct payee

This warranty protects banks from fraudulent RCCs.

Question 20

What is the purpose of the Transfer Warranty for RCCs?

Answer 20

Protects banks from fraudulent RCCs by ensuring proper authorization before transfer

Ensures checks are legitimate before they are passed between banks.

Question 21

To whom does the Transfer Warranty for RCCs apply?

Answer 21

Interbank transactions only

This means it applies between financial institutions, not between banks and customers.

Question 22

What is the description of the Presentment Warranty for RCCs?

Answer 22

A bank warrants to the paying bank that the check was authorized by the account holder in the amount stated and payable to the correct payee

Ensures the legitimacy of the RCC.

Question 23

What is the purpose of the Presentment Warranty for RCCs?

Answer 23

Ensures that the paying bank can trust the legitimacy of the RCC and prevents unauthorized transactions

Protects against fraudulent checks being presented for payment.

Question 24

To whom does the Presentment Warranty for RCCs apply?

Answer 24

Interbank transactions only

This warranty does not extend to customers or businesses depositing checks.

Question 25

What does Regulation CC §229.34(a)(1) and (a)(2) establish?

Answer 25

Transfer warranties for electronic checks and electronic returned checks ## Footnote These warranties ensure banks can rely on the accuracy of electronic checks and prevent duplicate charges.

Question 26

What is the Image Accuracy Warranty?

Answer 26

A bank warrants that the electronic image accurately represents all information on the front and back of the original check ## Footnote This warranty applies at the time of truncation and ensures all necessary details are included.

Question 27

What is the purpose of the Image Accuracy Warranty?

Answer 27

To ensure the electronic check contains all necessary details, preventing disputes over missing information ## Footnote This includes endorsements, signatures, and security features.

Question 28

To whom does the Image Accuracy Warranty apply?

Answer 28

Interbank transactions only ## Footnote This means it applies between financial institutions, not between banks and customers.

Question 29

What must the electronic check include according to the MICR Line & Amount Accuracy Warranty?

Answer 29

An accurate record of all MICR line information and the correct check amount ## Footnote Required for a substitute check under §229.2(aaa).

Question 30

What is the purpose of the MICR Line & Amount Accuracy Warranty?

Answer 30

To ensure that the MICR encoding is preserved correctly, preventing errors in processing and settlement ## Footnote This includes routing number, account number, and check number.

Question 31

To whom does the MICR Line & Amount Accuracy Warranty apply?

Answer 31

Interbank transactions only ## Footnote This warranty does not extend to customers or businesses depositing checks.

Question 32

What does the No Duplicate Payment Warranty guarantee?

Answer 32

No person will receive a duplicate charge due to multiple transfers, presentments, or returns of the same electronic check ## Footnote This includes substitute checks or paper checks.

Question 33

What is the purpose of the No Duplicate Payment Warranty?

Answer 33

To protect against duplicate payments, ensuring that a check is not processed multiple times ## Footnote This prevents financial losses.

Question 34

To whom does the No Duplicate Payment Warranty apply?

Answer 34

Interbank transactions only, but warranties also flow to: * Drawer customer (on forward exchange) * Owner of the check (on return exchange) ## Footnote This expands the protection beyond just interbank transactions.

Question 35

What does Regulation CC §229.52(a) establish?

Answer 35

Substitute check warranties ## Footnote These warranties ensure that banks can rely on the legal equivalence of substitute checks and protection against duplicate payments.

Question 36

What is the purpose of the Legal Equivalence Warranty (§229.52(a)(1))?

Answer 36

Ensures that a properly prepared substitute check is legally equivalent to the original check ## Footnote This means it can be used in the same way as the original for all purposes, including legal claims and financial transactions.

Question 37

Who does the Legal Equivalence Warranty apply to?

Answer 37

* Interbank transactions (between financial institutions) * Any person receiving a substitute check or electronic check created from a substitute check, including depositary banks, payees, and customers

Question 38

Who does the No Duplicate Payment Warranty apply to?

Answer 38

* Interbank transactions (between financial institutions) * Any person receiving a substitute check or electronic check created from a substitute check, including depositary banks, payees, and customers

Question 39

Fill in the blank: A bank that transfers, presents, or returns a substitute check warrants that the substitute check meets the _______ requirements outlined in §229.51(a)(1)-(2).

Answer 39

[legal equivalence]

Question 40

True or False: The Legal Equivalence Warranty applies only to transactions between banks.

Answer 40

False ## Footnote It also applies to any person receiving a substitute check or electronic check created from a substitute check.

Question 41

What is the significance of the No Duplicate Payment Warranty?

Answer 41

Protects against financial losses due to multiple processing of the same check