WASHINGTON - The Federal Reserve Board has issued a request for comment on a proposal that would clarify the rules governing the conversion of paper checks to electronic funds transfers.

Paper checks are normally governed by the Uniform Commercial Code. The Fed is proposing that checks converted at point of sale be treated as payments under Regulation E, which governs electronic funds transfers.

The proposal implies that checks converted into electronic transactions are never checks in the legal sense; during electronic conversions they simply become a piece of paper with bank account information that can be used to initiate an electronic funds transfer. From a legal perspective, the proposal maintains, the check is just a source of information.

Another Fed proposal is to let UCC rules remain in force when bounced paper checks are resubmitted for collection using electronic means. These are checks that have already been submitted once as paper items under UCC but have been returned for various reasons. Though the resubmitted entry would be an electronic funds transfer, which would save banks and merchants time and money, it would remain governed by UCC rules.

"These check conversion transactions present a hybrid of a check and an EFT, so there is some confusion about whether it is a check governed by UCC or covered by Reg E," said Kyung Cho-Miller, a member of the Federal Reserve's staff counsel. "The existing rules were vague."

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