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ICL – Check Fraud and Risk Mitigation
ICL Check Fraud and Risk Mitigation
But, and some ways to try to anticipate the fraud, understand the kinds of fraud that is out there, and ways to mitigate your risk, so let’s get started. First of all, as always, I’m not an attorney. I’m not giving you legal advice. So, you want to make sure that, in certain circumstances, you consult compliance and legal so that your action is appropriate.
So just some general thoughts about fraud. Obviously, we’ll talk about this at length, but one of the biggest sources of fraud and the ways to experience loss from fraud is, as the paying bank, when you pay unauthorized checks. But as a depositary bank, you also run risks of fraud and some of the ways, some of the potential fraud sources are your deposits: over the counter, ATM, RDC consumer, our favorite, RDC business; anything that you accept for deposit is potentially a fraudulent item. So, you’ve kind of always want to be aware of the risk.
Another source of fraud has been online account opening. That’s a relatively new channel for banks to open accounts virtually, not in person. You’re not looking at the at the new customer, but it’s a virtual process, which makes the process more susceptible to fraud. That someone is impersonating someone else and you’re not physically verifying identification et cetera. So again, it just needs to be factored into that product so that you have appropriate risk mitigation in place.
Remote deposit capture. That’s where we see a lot of fraud.
As a depositary bank, when you offer remote deposit capture to your consumers in particular, because those are the people that you have less stickiness with than a business, there is an opportunity for you to be a conduit for fraud. For example, your customer might deposit an altered item and that is the responsibility of the depositary bank because the depositary bank makes a warranty to the paying bank that a check is not altered.
When a depositary bank exchanges images through the Fed, they do not warrant to the paying bank that the check is not a forgery or not a counterfeit. But, again, you don’t want to be a conduit for a fraud and some, particularly consumer RDC customers, may see the anonymity of remote deposit as an opportunity to pass fraudulent items through. So why not? When you’re offering RDC, you want to think about how are you going to mitigate your risk. Consider that you review the deposited items and there are some automated fraud filters that can happen that can help you to do that. Certainly think about things like deposit limits, number of checks, dollar amount of checks being deposited daily. Does it make sense for a consumer to be depositing large dollar items, etc.? Consider placing restrictions on what you will accept through remote deposit. Because again, as a depositary bank, you do make certain warranties.
So you might not want to accept through deposit a check, that has no MICR on it. That might be an indicator of a potentially fraudulent item. Foreign items, checks gone, and other banks in other countries, that’s something that you definitely would not want to have happen through RDC; savings bonds, same thing. You want to see those and get those. Money orders. Cashier’s checks. Remember that cashier’s checks, you’re obligated to provide next day availability. So you want to make sure that you’re watching that.
Treasury checks. This is an interesting one because when you provide, when you present a Treasury check to the U.S. Treasury, you’re making warranties and we’re going to go through those warranties in a little bit here. So, I will, I know a question just popped up about those warranties. Go ahead, Mickey. Do you want me to read it to you now? Is that something we’re going to turn? Yeah, let’s could you go over what you said about there not being a warranty from the depository bank when banks exchange checks through the Fed. Yes, and I’m going to cover that, so hold on to your hat on that one because we’ll give you the citation and it will make a lot more sense.
So I was talking about Treasury checks. When you present a check to the Treasury, the Treasury has its own set of rules about the presentment, what they call guarantees, and among those guarantees is that you have made every effort to determine that the check is not fictitious.
So a Treasury check is like a hundred dollar bill. It bears all kinds of fraud detection devices ultraviolet light detection, microprinting, that kind of thing. You’ll never be able to verify that through remote deposit, but you’re making a guarantee to the Treasury that you did. So just consider that. Plus, obviously any time you accept a check through RDC, you run the risk of your depositor taking that paper check and negotiating it somewhere else. A substitute check, a redeposited item. You will probably want to consider that your customers bring those in and give you the paper. Again, these aren’t prescribed by any regulation. These are just some things to think about because RDC comes with inherent risk; you have to remember that what you’ve done is open a virtual teller window. So those checks are never going to be subject to the kind of scrutiny that they are when they are physically in front of a teller. And then, as I said, you want to consider setting transaction limits, dollar limits, those kinds of things.
Still let’s talk about who is at risk for forgeries and counterfeits. The paying bank has to detect and return expeditiously, or it will generally take the loss, and we’re going to get into this a little bit more presentment warranty that’s found in UCC articles three and four say specifically that the that the presenting bank has no knowledge that the drawer’s signature is not authorized. So in other words, they don’t know because the depositary bank is not in a position to know the drawer signature unless that check is drawn on that depositary bank.
An RDI, return deposited item, when you accept a check for deposit and it comes back for any reason, NSF, account closed, payments stopped. You’re going to suffer a loss if you can’t recover that from your depositor. Again, alterations, the depositary bank makes a warranty in the UCC presentment warranty that the check is not altered. So generally, the depositary bank is going to be liable if it presents an altered item. Now, I said “generally” because that’s what attorneys say. So we’ll get into some specifics.
And then kiting. We’ll talk a little bit about what that is, but both depositary banks and paying banks are subject to unrecoverable chargebacks and overdrawn accounts when they are conduits and victims of kiting.
Now, one thing I want to point out is that one thing that can happen, that can help you in detecting whether or not a check is counterfeit is knowing the routing number fractional form and, again a check can be printed on any kind of paper, other than a Treasury check. And so there is no real counterfeit detection on a check unless you have lots of experience with counterfeits and you start to see similarities.
One thing to look at and to consider is to know the fraction form calculation.
So when we look at the routing number on this sample.
You can see that same routing number is presented in a fractional form in the upper right-hand corner. And what you see here is the routing number is one-two, which is the 12th Fed. And then two is going to be the branch of the 12th Fed. One is going to designate that it’s a bank and then zero-zero-zero-three is going to be that specific bank’s identifier as defined by the American Bankers Association and in the last digit is the check digit. So, when you look at the fraction form, you can see that the city-state value, which you can’t look up unless you are actually a prescriber to Puity and to, to be able to determine the city-state value, but there’s going to be found by the ABA identifiers, so zero-three in this case is the ABA identifier. And then the denominator, that’s the number under the slash, or next to the slash is going to be the Federal Reserve routing number. So we see the one-two-two-one there that we see at the beginning of the routing number. So for example, here’s an example, from my past of a counterfeit check and here, there’s a significant noticeable difference right away in the fraction form. This this check is drawn on a bank in the ninth Fed, but the routing number er rather the fact, fractional form doesn’t even show that it’s just a made-up number. And what’s worth knowing is, your average counterfeit ER, doesn’t understand the fraction form, how to calculate it. So, when they’re being sloppy about printing up counterfeit checks, they don’t always know that that number has actual value in specific calculations.
I’m also going to point out the style of this check. I said earlier that there is no defined way to determine if a check is counterfeit, but when you’ve seen enough counterfeit checks you start to see certain styles of checks that are consistently counterfeit. When I see a check in my in my banking days, when I would look at a check and saw that style that you see here with that firm dark line, across the top that says, this document has a colored background blah, blah blah. And the style of the font of the check number. So often those were counterfeit, but I always became very suspicious of such a check.
And then one day, one of my business customers decided they were going to start printing their own checks and they use this style. So, it’s not, it’s not a science. But when you are experienced with dealing with a lot of forgery or particularly counterfeit, you might see a certain consistency in the kind of style of checks being counterfeited. Because obviously, we can now print checks on desktop publishing and this apparently is one of the cheaper, two types of style. So that’s just, I’m just sharing my experience on that. So you might also have seen that yourself.
So, let’s look at that presentment warranty and you find these both in article 3 and 4 the same and will just quickly go through these. The first warranty is that the depositary bank says, I’m entitled to enforce this chart. I gave value to the holder, holder being the person to whom that check is payable essentially, so that means you gave cash to the payee or put that check in the payee’s account. Second warranty you make is that the check is not altered. The third warranty, and this applies to a Fed exchange because an ECCHO exchange actually varies this particular warranty. So, if you send your checks through the Fed, you’re saying to the paying bank, I have no knowledge that the signature of the drawer of the draft is unauthorized.
And then the fourth warranty is superseded by a reg CC warranty. This warranty says, with respect to any remotely created consumer item that is authorized by the person on whose account is drawn. Reg. CC doesn’t differentiate between consumer or non-consumer, and Reg CC is federal regulation. UCC is state law. So federal regulation is going to supersede state law. So just remember as the depositary bank, you make a warranty to a paying bank that are remotely created check is authorized regardless of whether it’s drawn on a consumer account or a non consumer.
So hopefully this answers that question the warrantor has no knowledge that the signature of the drawer is unauthorized.
Let’s talk about cashier’s checks and U.S. Postal Service money orders in particular, because those are often used in different kinds of scams.
For example, I might advertise on eBay that I want to sell my motorcycle. So, somebody shows up. I’m asking a thousand dollars for it and they have a cashier’s check for $2,000. Oh, I made an error, just go ahead and wire me the thousand dollars and off he goes with my motor motorcycle.
I deposit that $2,000 cashier’s check my bank and I then wire thousand back to him, thinking everything is cool. Couple days later that counterfeit check comes back where that cashier’s check comes back as counterfeit. So that’s a very common scam. Another one that someone actually tried on me years ago when I am answered an ad to be a secret shopper.
They sent me a bunch of money orders said, go ahead and take it to Big Box and transfer those funds to someone else. Well, I knew enough that those checks I could determine if they were counterfeit by doing some checking and I’ll show you how you can do that. Another one we used to see this all the time. Someone standing outside your bank and then you find they see someone who looks nice, potentially vulnerable. I have a check but I don’t have a bank account. Will you cash this for me? You can keep $100 of it for yourself. Well, guess what? That check? The counterfeit.
And who ends up taking that loss? Well the paying bank does. But the depositary bank’s customer also takes a loss because they took got value for that. And if the paying bank caught it in time, that depositor’s account is going to be charged back.
And you all know this one. I love you. We met over the internet and maybe I’m in prison, or maybe I have some particular issue. Please, help me. I love you and they send you a counterfeit cashier’s check because they love you so much and etc. etc. Those are all the kinds of things that you want to be aware of so that you can help protect your customers, because they can often be victims of scams. Out of desperation and you can help them, particularly elderly people because we all have an obligation as banks to detect elder abuse, and to report it. CFPB has a website where they want every bank to report any potential elder abuse. So all of these things can be part of that.
And again, cashier’s checks can be counterfeit. So they are no more free of counterfeit in any other kind of check.
Let’s talk about cashier’s check. If you’re not sure. Someone is depositing a cashier’s check. Let’s say it’s for a thousand bucks or 5,000 bucks. Remember that reg CC says you have to make that cashier’s check available the next business day after deposit, if it’s over 5500 $25, you can delay that amount over that for an exception. Hold. A large dollar hold but if it’s under that you have to provide availability.
Maybe they have a dollar in their account and you’re not sure is this legit? You can always attempt to call the issuing bank shown on that cashier’s checks. Banks have stopped a long time ago from verifying funds in the old days and I’ve been around for a long time. We used to call another bank and say, hey, I got a check drawn on this account for this amount. Here’s the check number. Is it any good? And they say yeah, it’s good. And sometimes we’d say, can you put hold on it, and they say sure those days are gone. But a lot of banks will verify if a cashier’s check issued on them is legit. So always give that a try. It doesn’t hurt, but don’t call the number printed on the check. If there’s a phone number printed on that check if it’s a counterfeit check, that phone number is very likely, going to be that perpetrator’s accomplice sitting in the parking lot, outside your bank and the point is if you can’t be validated and you don’t feel good about it, there’s no law that says you have to accept whatever is attempted to be deposited. You can always say, you know what, take it to the issuing bank.
Now U.S. Postal Service money orders, as you probably know, they are definitely subject to fraud.
And there’s a website that USPS has that has tips for identifying counterfeit money orders, and I’ve got the URL here. You can also just Google them. And then they have a phone number that you can call to verify if the check was actually issued. You put in the Postal Service money order number and the dollar amount and they can verify whether there was a postal service money order issued under that number for that amount. Doesn’t mean that that’s not necessarily counterfeit, but it is another detection tool.
So forgery. This is where the paying bank suffers the biggest loss.
So first of all, UCC defines forgery as an unauthorized signature made without the actual implied or apparent authority. This includes a forgery.
Remember we said that UCC presentment warranty says the warranter has no knowledge that the signature of the drawer of the draft is unauthorized. Where that comes from is goes all the way back to a landmark case, settled in 1762 in English court, back when the U.S. was still a colony and we adopted that ruling in that law because it made sense. And basically, what that case determined was the party in the best position to know that maker’s signature, the drawer’s signature, is the person, and when we say person, we mean entity, who’s going to assume the loss on the author, unauthorized check. So in other words, if you can verify the signature, meaning, you know the drawer’s signature, but you pay a forged check, you’re going to you, the paying bank is going to be responsible to your customer.
So that’s something you just want to keep in mind because UCC essentially embodies that original Price vs. Neal case.
So, paying bank, you have some liability.
Paying bank, a bank may charge against its customers’ account a check that is properly payable from that account, even though it creates an overdraft, and item is properly payable, if it is authorized by the customer and is in accordance with any agreement between the customer and the bank. This is found in UCC 4-401, which says, when a bank may charge its customers’ account, paying bank can charge its customers. Count for a check that they authorized, even though it creates an overdraft. And even though, by the way, it is post-dated.
So remember that the paying bank is in the best position to know the drawer signature. Consider this, when you’re a depositary bank and you take a check that isn’t drawn on you, you don’t know what that drawer signature is look like. That’s why you make that UCC warranty: I have no knowledge.
All right, so base for the paying bank to attempt to mitigate its risk because what has to happen, everybody needs to look at their account activity every single day. So that a check that was charged against my account that was a forgery, I can call my bank today and they can return it timely.
Now a lot of banks offer positive pay for commercial customers who have high volume or high value checks, and essentially what that does is by agreement, it provides an opportunity for the issuing customer to review every check that’s presented in match against a file that it uploads of all its issued checks. So when there’s a variance they’ve got to resolve it per the agreement that you have with them and let you know, this one is not authorized so that you can return it timely and then you can’t, then you won’t suffer the loss. You might want to consider as a paying bank to set a certain threshold and review checks that are presented over a certain dollar amount to potentially mitigate your risk, there, of loss, if that’s a forgery or counterfeit, and it’s a big dollar item. So you can validate the signature to make sure that it matches the drawer signature that you have on file.
Now here’s the whole thing. The paying bank has to, if it’s going to return a check it has to return it. Timely. Regardless of the reason, there are no exceptions to this based on the reason for the return.
There are two clocks that start ticking when a check is presenting. One is the UCC midnight deadline. The other one is the reg CC expeditious return requirement
UCC midnight deadline says a paying bank has until midnight the banking day following presentment to settle or return a check. So in other words, Friday was a was a business day checks that were presented on Friday have to be returned by the next business day, which in this case is Tuesday is Monday? Because the legal holiday that’s not a business day. So today you looked at all of the checks that were presented on Friday and resolve the NSFs, the stop payments, the account not found, you sent them or you use flag them to be returned so that they get out of your shop by midnight and then reg UCC picks it up, so that it is back to the depositary bank tomorrow. The second business day after the presentment tomorrow by 2 o’clock.
So in an average non-holiday non-weekend, check is presented on Monday, banks paying bank has until Tuesday, midnight to get it out of their shop, so that it is back to the depositary bank on Wednesday, 2 p.m. That depository bank’s time.
Are there any questions about that?
I’ll take that as a no.
Now, there is an exception. There are rather, there are exceptions, Treasury checks are exempt from this expeditious return requirement. U.S. Postal Service money orders are exempt from this return requirement, and any check that is drawn on a unit of government, whether it’s state or local, and that means that it’s drawn on the government, not on a bank. For example, we used to see income tax refunds, state income tax refunds drawn on the state and those kinds of checks are exempt, local governments sometimes issue checks on themselves. They don’t see that as much, but it’s still possible. So just remember when you accept a Treasury check, a postal service money order, or a check drawn on a unit of government or deposit, that could come back to you weeks and months.
But if you exchange through an ECCHO exchange between ECCHO members, there is a there’s a difference. Remember we talked about that UCC warranty that the warrantor has no knowledge that the drawer’s signature is not authorized.
ECCHO rule 9 does a 180 on that, where in fact the depositary banks, the sending bank, warrants to the receiving bank, the paying bank, specifically that this is not a forgery. This is not a counterfeit. Now that’s a big change, the UCC warranty, which means that the depositary bank may be liable to the paying bank for counterfeits and forgeries, that accepted for deposit – unless there’s no funds left.
So it’s kind of a Hail Mary pass, the paying bank when it learns of a forgery, or a counterfeit past that return time frame, can make a rule 9 claim. There are timing requirements for that, and you can find all the all the particulars on our website. And I think, at some point, we are probably going to be doing a rule 9 session.
But the point here is that rule 9 will not impose a loss on the depository bank. What it does is it provides an avenue of recourse for the paying bank to say to the depositary bank? I make it a rule 9 claim and the depositary bank, if they still have the funds are obliged to return the funds. Now, the ECCHO rules do permit a member to opt out a rule 9, which means that they are not subject to a rule 9 claim, but they can’t make them either. And they have to stay off the dock for at least six months if they choose to opt out. They can opt out today and then opt back in tomorrow. You can find a list of the banks that have opted out. There’s only14 banks that have opted out of all of the thousands who are members of ECCHO, so be aware of that. There’s an option. It’s not a guarantee, but it is a way to attempt to recover. What this does is codifies what you can always do if you got the check through the Fed, pick up the phone, talk to the depository bank. You sent me a forged check. You sent me a counterfeit check. I know. You didn’t make a warranty to me. But if you still have the funds, will you agree to return it, I’ll give you a hold harmless letter. The point there is that the depository bank doesn’t want to have funds on deposit with one of its depositors that are fraudulently gained at the best. You’re telling them they have a fraudster for a customer, or they have a customer who is a victim of fraud, so that never hurts. You can always pick up that phone and talk to the depositary bank and agree. if they still have the funds, to have them return it back to you.
So any questions about that before we go any farther?
All right, whatever is spring water. All right. So you’re a depositary bank and you have a risk, obviously of checks being returned, for all kinds of reasons. So when you accept a check for deposit, and what kind of scrutiny are you applying to that deposit? Do you know the account activity history? Is this check a thousand dollar check and the account has been open for 20 days and has 10 bucks in it, and they’ve been overdrawn twice.
When they deposit that check, if that check comes back, is there sufficient balance in that account to be able to absorb that return?
When you accept a check for a deposit, are you properly identifying the payee?
Because remember, you make that warranty that you’re entitled to enforce, meaning you gave the value to the holder, to the payee.
Is it endorsed properly? If there’s multiple payees, are all those payees’ endorsements on there, and if there are multiple payees and it’s not payable alternatively, which means Nikki or Dal, but means payable to Nikki and Del, then it’s got to go into an account that both of us have access to. You all know what happens after income tax refund time when there’s a divorce going on. One of the parties takes that income tax refund, that’s payable to husband and the wife, and they put it in the husband’s account, or the wife’s account. And the other party doesn’t have access. That would be a breach of that warranty that you’re entitled to enforce.
When you look at a check you accepted for deposit, who’s the drawer of that check and really, you know, you can’t necessarily determine that but determine if that alone is indicator of fraud but is it is the drawer of that check a unit of government? Treasury or a business that is well known? Maybe it’s a payroll check, those kinds of things and obviously it’s a properly signed and dated? Dated is it stale dated? Is it future dated? Remember that a bank may pay a stale dated or future dated item unless their customers told them not to, but when you’re the depositary bank, you don’t know if their customer told them not to. There may very well be a stop payment on that check if it’s future dated or stale dated.
And then obviously, is it a check? You know, in the old days again when we issued paper checks, a lot of businesses would also give a voucher with that check as well. For example, a paycheck that would go the deductions, etc. etc.
How many times does a bank take for deposit the voucher instead of the check? Is there MICR on that check? Those are the things you want to look at.
Here’s another weird risk where someone steals my checkbook. But instead of taking my checks and forging them, they instead steal my deposit slip. Why would they do that? Well, they take a forged check counterfeit, check deposited into my account and then take cash back. So it looks like a legitimate deposit, looks like, you know, it’s a customer. They just getting cash back on a deposit. But guess what? The depositor is not the customer.
So always verify the identity when you have a cash back transaction, that person who’s making the deposit is it in fact the owner of the account.
Now, availability always comes into play because you have to make certain checks available the next business day following the date of deposit. And because the return time frame doesn’t necessarily mean it’s going to get back to you on the second day, particularly like we talked, Treasury checks, U.S. Postal Service money orders, checks issued on government, any check drawn on the Fed, that kind of thing. So, the second business day, you know, you have to make the first $225 of the deposit available. The third business day, you have to make the remainder of the deposit available up to 5,525. Any amount over that you can hold for a reasonable amount of time as an exception, large dollar hold. So the holds aren’t necessarily rather. the yeah a hold isn’t necessarily going to protect you because certain kinds of checks could come back to you. And the point is, when you accept a check for deposit, certain kinds have to be made available before you would likely get that returned back to you.
Now, there are exception holds, a new account, and that means an account that’s been open for 30 days or less. You can hold checks for longer days. If this is a large dollar item, single or aggregate, 5,525, any amount over that can be held for a reasonable amount of time. A reason a redeposited check and that’s where we talk about substitute checks, you can place holds on those. If an account has repeated overdrafts, which is defined as six or more times in the last six months or two or more days overdrawn 5,525 or more. You can put an exception hold on deposited items. And then there is this one: the reasonable cause to doubt collectability. What that means that’s defined as any reasonable person would say that this check looks fishy, but you can’t base it on a particular class of check or a particular kind of person depositing that check. For example again, and I’m always going back in history cash advance checks. Those were always problematic, but you can’t put a hold on it just because it’s a cash advance check. So you have to have reasonable cause to doubt the collectability.
Alterations. What is an altered check? That’s defined in UCC 3407. It means an unauthorized change in an instrument that purports to modify in any respect, the obligation of the party. Could be changing the payee name or adding words or numbers, or an incomplete instrument. Remember that if a check has to start his life is paper, which means that paper can be fiddled with, and the bank that accepts it for deposit warrants to the paying bank that it has not been fiddled with. It is not altered.
So how does that happen? Well, lots of scams there. If you live in a rural area where you have mailboxes where people put outbound mail into their mailbox and put a flag up. Fraudsters love to drive down those dirt roads, see what’s in that mailbox going out. If it’s a check made payable to, for example, a mortgage company. Boom. Let’s take that. And acid, wash it. Let’s change the payee name. Let’s maybe add a couple of zeros.
Business checks, where there’s a check that was issued legitimately to ABC company and somebody takes that check and types Mary Smith above that.
So does that handwriting of the payee or the or the font of the payee match? So when you see Mary’s name, Mary Smith over ABC company, is it the same font? If it’s typed, I think still typed, you know, and does the handwriting of the payee and the drawer’s signature match.
That’s not always an indicator of alteration because sometimes I might write a check, sign a check, and give it to someone and say, put your name in there and off you go. I would only do that with someone I really trust, but it’s not a good idea. Never a good idea. So again, is the font consistent throughout all of the writing on that check and then consider this does a deposit history, support the check that’s being deposited. For example, you might have an account that gets regular direct deposit. Are they usually writing checks? Or, they normally deposit, a check from their employer. And now, here’s the check from someone else. Does it make sense? Is that consistent? This is where you have to know your customer.
Just to emphasize in the presentment warranties, the depositary bank says to the paying bank, this draft has not been altered.
Now, let’s talk about endorsement fraud, and this gets back to that warranty that the depositary bank makes that it is entitled to enforce. When a check is made payable to multiple payees and not alternatively. So again, Nikki and Dal. It can’t just be endorsed by me and go into my account. That is a breach of your warranty. So either Nikki and I both have an account or you want Nikki to be there and you cash it, get Nikki’s endorsement and my endorsement, and make sure that you gave the money to both of us. Make sure that that check payable to a payee, goes into the payee’s account and not into a different account. This kind of, I guess, we’ll call it an error because it isn’t necessarily deliberate fraud, but it often happens with lockbox processors.
I’m writing checks to the electric company and to the water company, and I put the wrong check in the wrong envelope. And the check, payable to the water company goes into the electric company’s account, etc. That’s a breach of that warranty.
And again, identify the payee, get their identification, because I find a check payable to Nikki. I like forger endorsement and off I go. Well, the depository bank that would accept that check or negotiated for me, reaches its warranty that it’s entitled to enforce.
Now the other one, this is called a special endorsement, which is a legal endorsement a check payable to me. I happen to owe Nikki that same amount of money. So I endorse it and say pay to the order of Nikki. And give it to Nikki and she can negotiate that check and that’s perfectly fine. That’s a perfectly legal thing to do. But let’s say that Nikki takes that check and forges my endorsement. And then makes it payable to me or to her. So when you are as a depositary bank, looking at one of those checks, know your customer.
Is that first payee’s endorsement forged? That’s the heartburn of that special endorsement.
And remember that, that warranty, that the depositary bank makes that it is entitled to enforce. They have seen UCC, which has the 3-year statute of limitations.
So the depositary bank could get a warranty breach claim because they did not give value to the payee for up to three years from the date that check is presented to the paying bank. So keep that in mind.
And that’s what that warranty, the warranter is a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft. That’s all bunch of legalese. And remember that person means entity, really, not individual though. A depositary bank is saying to the paying bank, I gave value to the payee.
All right. So what are some ways to help prevent loss as the depositary bank? Again, we talked about this always verify the identification of the payee. Make sure that you see their signatures match their identification.
Does the endorsement match the payee name if it’s payable to Nikki has it been endorsed by Nikki?
If there are multiple payees and it’s payable to them, not alternatively. In other words, it says, Nikki and Dal not Nikki or Dal, because essentially what that means of the absence of the symbol or word “and” is going to mean “or,” that means it’s payable to them, alternatively. If it’s not payable to them, alternatively, are all the payee signers on the account? You see that sometimes we’re checks are payable to joint account owners. As long as it goes, into the joint account, you’re cool.
It’s a third-party check, again that special endorsement, where a check payable to me, I endorse it make payable to someone else who deposits it. If that check comes back up to three years, as a warranty claim, warranty breach claim. Can you recover from that loss? If you can’t, you’re going to take the loss because that warranty is not conditional. Same thing with all through checks, by the way, that warranty is not conditional on that. Are the depository bank to be able to recover from its depositor. The warranty is made by the presenting bank, the depositary bank, and if they end up suffering a loss because they breach that warranty, they cannot refuse to honor their warranty.
Any questions about any of that so far?
Right, guys are good.
So kiting. This is a favorite. A customer deposits a check with your institution that is drawn on their account at another institution.
So now they have a balance with you, and then they turn around and write a check on that account and deposit that into the account, into the bank, where they have the account of the check that they just deposited with you and they go back and forth. And if a bank pays against uncollected funds, you are risking being a victim of kiting and the kiter is going to keep repeating it until they’re caught. And the game is always the first bank to detect that kite and collapse it is going to be the winner.
So make sure that, you know your customer
Are checks drawn on another financial institution for the same name as your account holder being deposited into their account? Is that current balance a collected balance or are you paying checks against an uncollected balance? You want to know that.
Are checks written on the account being made payable to the other account holder and deposited? So you can tell that you might look at checks that you’re paying and see what bank presented them to you etc. etc. So make sure that you know that account history, make sure you know the overdraft history, the chargeback history. Look at the velocity reports. How quickly does money go in and come back out.
And some considerations, review large dollar items paid and be very . . . um, I don’t want to say suspicious, but review large dollar items being deposited.
Look at your kiting and velocity reports, you’re your core provider generally will have those kinds of reports available to you. Velocity means again how fast is money going in and coming out. Look at the NSF and uncollected balance reports and look at your balance fluctuation reports. And that really means is yesterday there was 5,000 dollars in the account today there’s two bucks. Day before that, there was two bucks, the day before that there were six thousand dollars in that account. Boom. Boom. Boom. It’s going up and down. Why? you want to know that.
Now when you’re in RDC BOFD, we talked about this, you’ve got risk, you have a person who is virtually depositing checks and you’re not looking at those paper checks, so you can’t necessarily determine from the image if it’s altered.
You can’t identify the payee because it’s a virtual deposit. So is that endorsement a forgery? How will you know that? You got to know your customer. And remember that every bank that presents a check to a paying bank, regardless of whether they took it in paper form or through RDC, warrants to the paying bank that no one’s going to be asked to pay the same check twice, we call that the no double debit warranty that lives in reg CC, which has a one-year statute in limitations.
So what obviously we know the drill that happens and this more often happens with consumer RDC than it does business RDC where your consumer, customer takes a picture of a check deposited with you through RDC and takes that physical check and cashes it at a check casher or another bank or deposits it through RDC at another bank, and another bank, and another bank, the most number of banks that I’ve heard up with a duplicate situation was 12, which is amazing.
Remember that the RDC depositary bank is considered under reg CC to be the truncating bank, which means they stop the paper, but they never got the paper and you have no control over it. And that’s why there’s that RDC indemnity that lives in reg CC. What that says is protects a depositary bank that accepts the paper check without a restrictive endorsement. For example, a restrictive endorsement would say for mobile deposit only to ABC bank and now that paper check with that restrictive endorsement is attempted to be deposited into XYZ bank. Well, that restrictive endorsement, a check like that should not be accepted by XYZ bank. So a paper bank, a depositary bank that accepts the paper without that restrictive endorsement, if it suffers a loss because that check has already been paid so they get a return or adjustment and can’t recover from their depositor, they have recourse against the RDC depositary bank. And here’s the final text rule. The indemnity is provided by a depositary bank that is a truncating bank because it accepts the deposit of an electronic image of the original check. It doesn’t receive the original check, but it receives settlement for it and it doesn’t receive that check returned as unpaid. That bank will indemnify a depositary bank, that accepts the original check for deposit for losses that is incurred by that depository bank if that loss is due to that check having already been paid. And again, if the depository bank took that paper check with a restrictive, endorsement inconsistent, with the means of deposit. Again, that restrictive, endorsement says, for mobile deposit only to ABC bank, and XYZ is accepting that paper item with that endorsement, they cannot make that Indemnity claim.
Now, do pay attention to the language here. The indemnification is not provided to the depositor. For example, a check casher cashes that paper check, gets returned back to them as having already been paid, and they suffer a loss. They are not subject to that indemnity because that indemnity indemnifies the depositary bank.
So again, some RDC operational control considerations, we talked about that, dollar limits. What kinds of items will you accept through remote deposit? Certainly review new account activity, and consider enforcing a restrictive endorsement requirement, with the full understanding that if you see that restrictive endorsement on the image that was deposited, that that is not evidence it’s on the piece of paper. The game there is I take a picture of the front of a genuine check. I know that you require restrictive endorsements. So, I put a restrictive endorsement on a piece of paper that is the same size as the check. And now I deposit that front and back and to you it looks like I put a restrictive endorsement on the check, but the physical paper doesn’t bear that restrictive endorsement.
So that’s the gambit that fraudsters use. Monitor NSF chargeback, particularly paid adjustment activity. Establish and enforce those acceptable thresholds.
Yes, I’m about six minutes left and we’re creeping up on five. So just kind of update that good.
Thank you. All right. So let’s review the no double debit warranty. It says no person is going to receive the image for a check. That has already been paid. Every presenting bank makes that warranty. So duplicates. They cause all kinds of problems. They can affect innocent parties. They create reputational risk, potential loss of customers. They result in, lots of time spent on adjustments, etc. etc. etc. Potential holds are in due course issues. And we’ll talk about that in another session.
So here’s the thing. I always say, don’t give remote deposit to anybody who just has a pulse. Always have some customer qualification requirements, have strong agreements, regular reviews and keep your risk assessments current. The point here is knowledge is power, when you know the risks, you can put in procedures and training and education to help mitigate that, Your frontline people are really your gatekeepers to help you mitigate your rod, your risk. So make sure they know all the all the things that they need to know. Understand the warranties, know the risks. Know the mitigations in place.
And that my friends, is my story. You can find more of our education sessions on our education page. If you’re an NCP, you get continuing ed credits. So don’t hesitate to check that out. You have questions about this particular session or if you are an ECCHO member, you can contact me any old time about any kind of question you have, and I’m happy to help you. Here’s my email address, don’t hesitate to use it.
Are there any questions before we leave?
And I just wanted to say thank you to all the attendees and thank you too, Dal, for your time again today. And we’ll be back here. Same time. Same place next week. Look forward to seeing you all there. Take care everybody.
ICL – Check Warranty Breaches and Dealing Direct
ICL – Check Warranty Breaches and Dealing Direct
ICL – Check Warranty Breaches and Dealing Direct
Lovely and warm where you are here in Michigan, where I am, it’s still winter and even though it’s February, the longest month of the year, right? So, last time we got together, we went through the warranties and indemnities that live in Uniform Commercial Code and reg CC that govern check. And we went through those in some detail. I’m going to go through those again. Because with, you know them and you know where they live, you can pretty much work yourself out of any challenge that you run into with check.
So we’re going to talk about what happens when those warranties are breached and how to deal with it. So as Nikki said as we go along, if you have questions type in the chat box, I’ll stop periodically and will address your questions.
First off, let’s make sure I can get this going. Here we go. I’m not an attorney. I’m not giving you legal advice. So as always, first, this particular circumstances, you’re going to want to contact your legal counsel to make sure that you take the appropriate action.
So let’s start out by looking at the agenda. We’re going to go through the legal framework again. We’re going to talk about the warranties that you make as a presenting bank and you use when you are depositary bank. You accept a check, you send it on to the paying bank you make warranties when you’re paying bank and check are presented to you are warranted you.
And then we’re going to talk about how images are actually exchanged and how to fix warranty breaches. So, to start out, I’m going to remind you again that there are two bodies of law that govern check the first being state law, just Uniform Commercial Code. It’s adopted by each state, and it can vary from state to state. So it’s important that you know your state’s version of UCC. There are 1400 articles that live in UCC. Articles three and four are all about check. Article three defines negotiable instruments and I would strongly recommend that you save that to your favorites because there’s a wealth of information there. And Article four talks about banks’ obligations to each other and to their customers. So, there’s a, like I said, there’s a wealth of information there. And I’m going to stop here because I want to let you know, I’m using what’s called the model UCC. So, this is the version of UCC that is presented to every state to adopt or to amend as they see fit. There are some states that very certain timing requirements. So why I say it’s really good to know and save your state’s version of UCC. The other body of law that governs check is a Federal regulation regs CC, that’s where you’re going to find the definition of an electronic check, as reg CC acknowledges that we are exchanging images of check. UCC really was written for paper and doesn’t go to the image exchange.
in reg CC, you’re also going to find the availability requirements and you’re going to find the warranties and indemnities, which we are going to talk about today.
To start out with the question that every bank wants to ask, and I get this all the time in various ways, but when can you charge your customers’ account? And UCC 4-401 is very, very explicit. A bank may charge against the account of a customer an item that is properly payable even though it might create an overdraft.
And what properly payable means is it’s authorized by the customer and is in accordance with any agreement between the customer and the bank. So if I’m a customer of your bank and a counterfeit check pays against my account, that check is not properly payable because I didn’t authorize it, just like a forged check or an altered check. Whatever I didn’t authorize is excluded from these terms of when a bank may charge its customers’ account. So, you want to keep that in front of you, whenever you’re dealing with issues when your customer calls you about a check that is a problem.
Now the warranties they live in both articles 3 and 4, and they are the same in both articles and there are four warranties and really three that you want to be very familiar with. The first one is that the warrantor, which means the bank that accepts this unaccepted draft and obtains payment, or gives payment for it, warrants to the paying bank that they are entitled to enforce. And what that means is they gave the value of that check to the payee.
The second warranty is that the depositor bank says to the paying bank, this check has not been altered.
Third one in this applies specifically to Fed exchanges because an ECCHO-governed exchange does a 180 on this particular warranty. So, if you receive your checks from the Fed as a paying bank, the depositary bank says to you, we have no knowledge that the signature of the drawer of the draft is unauthorized.
And I see, I don’t forget the slide with the terms. The drawer is the party who writes the check. We sometimes, it’s called the maker, but that term in UCC and regs CC is the drawer. So when you write a check, you are the drawer. The paying bank is referred to as the drawee.
So the depositary bank says the paying bank, we don’t know that the maker signature is not authorized because how would they know? When you accept a check for deposit that is not drawn on you, you have no way of knowing if that drawer signature authorized or not.
And then the fourth warranty is superseded by a warranty that lives in reg CC. This one addresses, specifically, remotely created consumer items that when a bank presents it to a paying bank, they’re making a warranty that it is authorized but it is specific to consumers. Now again, reg UCC is a lot older than reg CC. So it was attempting to protect consumers but reg CC picked that up and applied that to everybody, and we’ll look at that.
So, in reg CC to 229.34 – commit that to memory, save that page in your favorites. You’re going to find the electronic check warranty, which means that the bank that takes that paper check and images. It makes a warranty to the paying bank that accurately represents the original check.
And when we first began exchanging images, that was sometimes a problem, but that really hasn’t been any kind of problem for a number of years because pretty much procedures and technology has developed to the point where we don’t have mismatches like we did it first. And then also you’re, this is where you’re going to find the, what we call the no double debit warranty. And basically, it says, depositary bank says to the paying bank, no one’s going to be asked to pay the same check twice. So, when a bank presents a check to a paying bank, it says no one’s going to be asked to pay this twice and every single bank that presents that same check makes that same warranty.
And here is where reg CC picks it up with the RCCs, a remotely created check and does not differentiate between consumer or non-consumer. It simply says that the presenting bank says to the paying bank, this remotely created check is authorized in the amount and to the payee and against the account to which is charged. There’s also a warranty for encoding; depositary bank warrants to the paying bank that it encoded the check for the right amout and settled for the right amount.
And then also the return check warranties and I’ll emphasize this again, and again, paying bank. When it returns a check, it warrants that it returns it timely. And we’ll look at those timings again, and then the RDC in the remote deposit capture and the ECI, electronic check image indemnity, also live in reg CC.
So let’s talk about the exchange. Neither UCC are reg CC prescribe how images are exchanged. You always exchange by agreement. So if you go through the Fed, you are agreeing, when you sign up with the Fed, to abide by the terms of Federal regulation J and accompanying operating circular OC 3. So as such you agree to exchange your images, through the Fed, send them and receive them. You agree to use their adjustment platform and to do your returns through them. Reg J has particular warranties in there that we’re not going to talk too much about. They don’t vary the terms of reg CC or UCC those will always be part of that exchange reg C and UCC
They go through a private exchange where you’re not going through the Fed, but for example, at ACBB, if you agree to send your images to them, they’re going to peel out all the end points that are bound for their other members and then for other ECCHO members and those are all going to be governed under the ECCHO rules, which is really the purpose of ECCHO rules. They were designed to provide a rule set for the exchange of images back in the day when we were exchanging paper.
Now, it’s pretty much the way we exchange is by images and when you exchange privately, you need to have a rule set so everybody’s abiding by the same rules. That’s where the ECCHO rules come in. So you agree to exchange under the ECCHO rules. You agree to abide by the rules. You agree to adjust and return in accordance with those rules. And again, there are the reg CC and UCC warranties are not varied except for one warranty, which we’ll look at and that’s called Rule 9.
So let’s first look at the return check warranties. When a paying bank or returning bank returns a check, it warrants, makes a warranty that are returned it within the midnight deadline found in UCC, which says the bank may revoke the settlement and recover the settlement if before it has made final payment and before its midnight deadline, it returns the check. The midnight deadline is the day after the check is presented.
Then reg CC picks it up and says so that it gets back to the depositary bank, the second business day following the day it was presented by 2 p.m., that bank’s time. So, in other words, a check that is presented to you yesterday, this morning you were working your NSF, stop payments, account not found. And if you’re going to return it, you return it by midnight tonight do that it gets back to the depositary bank by 2 p.m., their time tomorrow, and each of those days are business days.
It’s important to remember and to note that there are certain types of checks that are exempt from those return requirements, surprise, surprise! checks drawn on the Treasury of the U.S., U.S. Postal Service money orders, or any check that is drawn on a unit of government and not payable at or through a bank. So for example, a check that is issued in the paper days, we used to see income tax refund, check state income tax refund checks and they were not drawn on any bank. They were drawn on the state. Just like when you look at a Treasury check, it’s not drawn on the bank, any bank. It’s drawn on the Treasury. So those entities and U.S. Postal Service, they are not drawn on a bank. So when you see those just remember that they can be returned or adjusted and generally, the Treasury will do reclamations but those returns can come back to you, months and months and months after you presented them. So just be aware of that.
So, before we go any farther, are there any questions?
One just popped in. It says, what is the liability, responsibility of issuing large item return notification in a timely manner?
That’s a very good question. And that is something that is outlined in the reg CC requirements, which I don’t have up here, but when you return, an item for greater than $5,515, there is a requirement that you provide a return notice back to the depositary bank, but here’s the kicker and here’s a very interesting part of that, that notice can be provided in paper form. It can be provided by giving him a telephone. It can be provided by the timely return of the check. So, when you look at 229.31, it will tell you that, that late return, or the large dollar return notice, can be in the form of the timely return of the check itself. Excellent question.
So what that means is, if you are returning your checks timely, you do not have to do what is sometimes referred to as an EARNS notice or an LDRIN, the Fed used to call it return the check timely, and you’ve provided notice.
So what is a warranty breach? So, we looked at the warranties and just think of like when you buy a car and you have a warranty that, you know, the drivetrain is going to last X number of days or years or whatever, that company that manufactured or sold you that car made a warranty. When you make that claim to them because your drivetrain fell off your car, they are obligated to fulfill their warranty. And if they don’t, they have not met their legal obligation to you. And that warranty is not a conditional warranty. You’ll notice those warranties didn’t say the check is not altered unless I can’t recover from the depositor. Then I’m not making any warranty at all. That’s not the truth. The warranty is not conditional on the warrantor’s ability to recover its loss.
Some warranty breach claims can be handled through the adjustment process, like an encoding error or a remote deposit capture indemnity claim, or few others, but most warranty breaches have to be handled by dealing direct. That means the party that received the warranty, the paying bank, has to deal with the depositary bank, the party that made the warranty and said, here, you breach your warranty, pay us back. So, as I said, some can be made through an adjustment process, not very many. So you want to know what your adjustment process will allow you to do and when you have to deal direct.
And that’s what we’re going to be talking about today, about dealing direct. So, do know your adjustment platform specific rules and timing. Whether it’s, the Fed, you will find on their site, different kinds of, I types, adjustment types and the timing for which you have to do those with entry and without entry; with entry means you get the credit or debit right away; without entry means that they send a message to the other party.
Do you want to know what that is? So let’s talk about the paper check. Because again, these regulations all started out with paper and a check has to begin its life as paper. That’s why we have that ECI indemnity. If I email you a check that I created and signed electronically, that is not a check. It must begin its life as paper.
So the drawer writes a check to a payee. So I write a check to Nikki. She takes that check and deposits that in her bank, either in paper form, or if her bank gives her a remote deposit capture. You’ll deposit that as an image. If she goes into the bank and lays that paper down on the teller counter, that teller is going to be looking at, they’re going to be looking and identifying Nikki. Making sure that check doesn’t appear to be altered, all kinds of things. There’s teller review when that paper check is deposited.
And that’s an important thing to remember because when you accept checks for deposit through RDC, you don’t have that kind of review.
So, the depositary bank would take that paper check and send it to a collecting bank, which could be the Fed or a correspondent bank, a bankers bank, that kind of thing. And then that collecting bank would then send that physical piece of paper to the paying bank, and you can imagine there were Planes Trains Automobiles, the whole nine yards there and all kinds of things could happen. Planes could crash per year, trucks could crash break down. There could be weather etc. etc, so it was always a dicey thing to get the paper from the depositary bank to the paying bank, who then would charge the drawer or the maker’s account.
Now if that account had no funds in it or if that check had a stop payment on it, then the paying bank would send that paper back the way it got it timely and get it back to the payee who would receive that original check with a big old stamp on it that said, payments stopped or NSF. And like I said, that all involved physical transportation of that check.
So when that teller review takes place, what are they looking at? Well, first of all, they’re looking at the endorsement because, remember, that depositor depositary bank warns that it is entitled to enforce that check, which means they gave value to the owner, to the holder, to the payee. So, are there multiple payees? If there are multiple payees then that check needs to go into an account that all those payees have access to. Is the payee present, have I identified that payee, have I given credit to the payees account? That’s that critical step that needs to take place when that check is being presented to be deposited.
What kind of a check is it? You know, if it’s a cashier’s check you know that you have to give availability the next business day.
And if it’s a government check, you know, that that check would come back any time. So, it’s going into an account that you know how much funds is in that account, in case that is charged back, etc. etc. Personal or payroll. There’s no difference in terms of the availability requirements, but it makes a difference as to how well you need to know your customer. If they are regular customer and every week they come in and bring in their payroll check, you have reason to believe that that check is going to pay pretty regularly, based on your experience with that customer. This is where it all comes down to know your customer. Another thing that takes place at that review is, was that check altered? Are there different different inks, different fonts, different handwriting, different typing on it, do the character amount and the legal amounts match? All that stuff. What’s going on there is that depositary bank is ensuring that it honors its warranty that the check is not altered.
And when you’re a counter agreement is going to talk about your relationship with your customer, and you basically tell them and this is where you guys want to know what your account agreements say that, you’re basically saying that everything you deposit us with us is provisional. It comes back, we’re going to charge a back to you.
Also, your account agreement should address future dated and stale dated checks. Future dated: if I write a check to Nikki, but I dated March 23 because I’m not getting paid until March 20 my bank can pay it and UCC 4401, we talked about when a bank may charge its customers’ account. Also says, you may charge your customers account, even though it’s before the date of the check.
Stale data checks, a check that is greater than six months old. A bank may pay, but is not obligated to pay, and you’ll find that in UCC 404.
So, your account agreement wants to tell your customer that we may pay a check that is future dated or stale dated unless you tell us not to because nobody, no bank looks the at the dates of every check being presented anymore, which is why UCC says you may pay those. So there’s no rule that says a stale dated check must be returned or a stale dated check can be returned up to one year after it’s paid. I’ve been asked that a number of times, The stale dated may be paid by the paying bank, unless their customer tells them not to and that would be in the form of a stop payment order.
Now, there’s also another term that is defined by the UCC 3304, which calls a check greater than 90 days from the issue date overdue. It does not mean it’s non-negotiable. It’s still completely negotiable, but it has a different legal status and that particularly comes into play if that’s a cashier’s, check and holder in due course issues, which we’re going to talk about in a future session.
So now, let’s look at how we are actually paying checks today with image, the payee. I write Nikki a check and she remotely deposits that check with her bank. There’s no physical review, generally, unless you are looking at all images of deposited items with the understanding that if you are requiring your customers to put a restrictcive endorsement for mobile deposit only on the back of the paper item, when you look at the image of that, deposited item seeing that on the image is not a guarantee it’s actually on the paper. So, you need to be aware of that risk. So the depositary bank takes it without generally the kind of physical review that it would if it took that over the counter as a piece of paper, going to send the image to the collecting bank is going to send the image to the paying bank going to do the same thing is when it got a paper check. And if there are funds or there’s NSF, the image goes back and instead of getting the original item, Nikki will get a substitute check.
So the whole process is electronic and, boy, it made a huge difference. When everybody started exchanging images, we no longer had to worry about weather and planes and trains and automobiles. We were able to send these through, essentially, at the blink of an eye compared to all that physical transportation.
So, before I go any further, are there any questions? Take that as a no.
All right. So what are the timings of these warranties?Well, first of all, UCC has a three-year statute of limitations and that’s defined in UCC 3-118. So if something comes up, that claim has to be made within three years of the occurrence. So, for example, if the payee of a check says to the drawer, hey, where’s my money? You owe me money. You said you were going to send me a check. And the drawer says, I wrote you that check two and a half years ago. And here’s a copy of it as it showed up in my statement. And the payee looks at that and says that’s not my endorsement. It’s either missing or it’s forged, and I never got it.
That is a potential breach of warranty on the depositary bank, that it was entitled to enforce and it could get that claim for up to three years from the date that check was presented to the paying bank. That’s particularly important when we talk about multiple payees, and I’ll talk about that in a second. Now, the altered check warranty, which also lives in UCC, has what’s called a one-year preclusion rule. UCC 4-406 puts an obligation on the customer to examine its statement and report within one year of getting that statement any alterations or any unauthorized signatures. And what that does is that reduces the liability of the paying bank and the depositary bank, but that may be varied by agreement. It almost always is. So here again is where you want to know what your account agreement says.
Typically, what I see most banks say let us know within 60 days of getting the statement. If you don’t and you tell us about an altered check or an unauthorized signature outside of that time frame, you are precluded from asserting a claim against us. So do know what your account agreement says. Now, the warranties that live in reg CC, like the remotely created check warranty, the encoding warranty, the no double debit warranty, those all have a one-year statute of limitations. And again, that statute of limitations clock starts from the date that that check was presented to the paying bank.
All right. So let’s talk about that first warranty. Entitled to enforce.
Now endorsement is variously misunderstood. And what’s really the most important is that the endorsement is critical to the depositary bank because what they’re doing when they accept that check and the payee endorses it, that payee is endorsing it for the purpose of negotiating that instrument, restricting the payment of it, for example, for deposit only. And it incurs the endorsers liability on the instrument. Meaning, it’s that check has returned unpaid for any reason NSF, payments stopped etc., that endorser is going to assume the liability and they’re going to be charged back for that by the depositary bank. So the value of the endorsement is primarily to the depositary bank. The paying bank is not in a position to know that payee’s endorsement and the drawer, the person who writes the check is not in a position to know the payee’s endorsement, which is why that warranty lives for three years and is not altered by that one-year preclusion rule Because your account owner when they write a check, they aren’t going to see on their statement that an endorsement is a forged endorsement or that it’s missing; even if it’s missing, that doesn’t mean the payee didn’t give value for that check from the depositary bank.
Now this happens a lot and I have a name that people like to misspelled. So, if I get a check made payable to me, and it’s spelled wrong, I still want that funds. And the UCC 3-204 anticipates that that if an instrument is payable to holder under a name, that is not the name of the holder, for example, for me Dale Bolt. Instead of Dal Bolt or Yoko Ohno instead of Yoko Ono, the endorsement may be made by the holder and the holder is a person to whom that check’s payable, in the name stated in the instrument or in the holder’s name or both. And that’s typically what most banks will do. But the signature in both names may be required by the depositary bank. So Yoko comes to you. She has an account with you. The check is payable to her spelled wrong. You asked her to endorse it as it was spelled, and then you asked me to endorse it as her name appears on your account and her identification.
Now if you’re wondering why I’m spelling indorsement with an I because you are more familiar probably and seeing it spelled with an e. I is how it’s spelled in all of the regulations and there are reasons for that, but we won’t get into that here.
All right. Now, UCC 3-205 talks about other kinds of endorsements. The first being a special endorsement, and that means, if the endorsement is made by the holder, the payee, and then is further made payable to someone else, that’s called a special endorsement. For example, I owe Nikki some money and I get a check payable to me from someone else that happens to be for that same amount. So I endorse it as it is made payable to me, and then I write “pay to the order of Nikki Clarke,” and then I give her that check. That’s called a special endorsement, nothing wrong with that. But as, you know, depositary banks have some heartburn with it. Because when Nikki comes in to deposit, that do they know unless I’m standing there with her that I really did endorse it. And that’s where you have to know your customer.
A blank endorsement does not mean that there’s no endorsement. It simply means, it’s endorsed by the payee and that’s it. There’s no further instructions. No restrictions, no paid further, pay to the order of whatever, whatever. It’s just blank, a check payable to me is endorsed by me and that’s it. That’s called a blank endorsement.
And then anomalous endorsement is an endorsement that gives paying banks heartburn. And this is not uncommon and it simply means an endorsement made by a person who’s not the holder of the instrument, not the payee of the instrument, the most common kind of anomalous endorsement is a check that’s payable to ABC company, but it’s signed by Bob Smith CFO.
Well, he may have the authority to act on behalf of the ABC company, and when Bob goes into the bank, ABC or rather the bank, make sure that that check goes into ABC company and Bob Smith endorsed that on behalf of ABC company and the depositary bank honors its warranty that it’s entitled to enforce. However, if the paying bank is looking at that check, because it happens to be a large dollar item, and they see not ABC’s endorsement, but Bob Smith, they may think something’s funny.
But remember that, and this is an important thing, the paying bank is not in a position to know if the depositary bank breached its warranty. It has to start with the payee.
So if the paying bank – and some of us have done that, used to do this too, and it creates more trouble – would return that check for guarantee of endorsement, when in fact, the guarantee is already there in the form of the warranty, what that can sometimes do is cause more problems. A check gets instead of redeposited with a nice stamp saying endorsement, guaranteed instead gets charged back to the payee’s account, who calls the drawer and says, why did your check come back to me? So it can create a lot of problems.
So I’m going to stop right there. Do we have any questions so far?
Did receive one question. So the question is, whose responsibily are washed/altered checks, meaning everything looks good, signature, but the customer contacts the bank and reports a fraudulent check, clearing their account and it is past a return timeline.
So if I’m understanding that question, we’ve already discussed that, remember that the depositary bank makes a warranty to the paying bank that the check is not altered. So if the drawer of the paying the paying banks customer says, I wrote a check to John Smith for 100 bucks and it paid for a thousand dollars and it’s payable to Mary Jones, that would be an altered check and that is a breach of warranty on the paying that part of the depositary bank.
Anything else? That was the only one. Hey, all right.
So now let’s talk about the restrictive endorsement. That’s become much more of a hot topic these days in the days of the remote deposit capture indemnity and restrictive, endorsements have lived forever, and you’ll find the definition and UCC 3-206, and it simply says that it limits the negotiation or the payment to a particular person or a particular method of negotiation, for example, for deposit only. That was the more common type of restrictive endorsement we used to see, which meant that that check is not to be cashed. It’s to be deposited in the payee’s account. So, a restrictive endorsement restricts the method of the negotiation of that check to the terms of that endorsement.
Now, let’s talk about multiple payees because this comes up from time to time. And remember that I said that UCC has a three-year statute of limitations.
So if a check comes in and wants to be negotiated at your bank, and it’s payable to two or more persons, alternatively, then it’s payable to any one of those. So, if it’s payable to George comma Paul or Ringo, George can cash it, Paul can cash it, Ringo can cash it. It can go into George’s account or Paul’s account or Ringo’s account. But if it’s payable to two or more persons not alternatively, it’s payable to all of them and may be negotiated, discharged, or enforced only by all of them. So, the check is payable to John and Paul and George, John can’t come in and cash it. Paul can’t deposit that in his account. They have, the check has to go into the Beatles’ account or into an account where John and Paul and George are all signers. That’s important to remember. Because that check, one of those one of those payees could come back to the paying bank or up to three years and say this check did not, I did not get credit for it. And that would be a potential breach on the part of the depositary bank. And I always say potential. Because in the event that a breach has asserted, the depositary bank has to prove that it either honored is warranty or did not.
Now, if it’s ambiguous as to whether it’s payable to two or more, alternatively, it’s going to be payable to the persons. Alternatively, for example, George comma, Paul comma, John. The word “and” is not there. So it’s not clear or rather, it’s ambiguous. So it’s payable to any one of those people able to them, alternatively. So within this case, George or Paul or John in there are check were deposited into their account. So really your rule of thumb wants to be if it doesn’t say “and” or if the symbol & isn’t on there between the payees, then it’s going to be “or.”
All right, so now let’s talk about what happens when the payee says, I never got the funds of a check that was paid, and who starts that claim. Nikki wrote me a check. She owed me some money, and I’m not very good with my finances. And maybe two years later, I say, Nikki, by the way, I sold you, my bike back in 2020. Where’s my money? And Nikki says, well, I wrote you a check for that way back in 2020, and it paid against my account, and I say, well, I’m pretty sure I never got it. So Nikki pulls up her statement. Prints a copy of that image, that check, shows to me, shows me that it paid and what’s wrong with that? Well, my endorsement is either not on there or it’s forged, and I say I never got it. So now you’re the paying bank, Nikki comes to you, the paying bank and says all right. Hey, he says he never received the funds. What do you do?
So what you don’t do is just pluck that check from the past and return, it unless that check paid yesterday, you cannot return. It. Remember our return warranties that are paying bank makes when a return to check that it does so timely, if you return a check late, it’s a warranty breach. So in this particular case, you don’t have an adjustment avenue and you can’t return it. What do you do?
So, here’s the return time frame, so I want you to memorize these. So what do you do? What need first is a statement from the payee that says, I’ve looked at that check, that paid check and I’ve seen it front and back, and my endorsement on that is either a forgery or it’s not there and I need to state, I never received value. So you, paying bank, want to get a written statement from the payee, and it’s always a good idea to have that notarized, not because any regulation requires it, but it’s when you’re going to present that endorsement, that endorsement claim to the depositary bank. You want to let them know that you in fact got a sworn statement from the payee that they never received it. You got a deal direct with that depositary bank. You have to send them a warranty, breach claim letter, saying, you breached the UCC presentment warranty that you’re entitled to enforce, here’s the statement from the payee, proved to us or to the payee that you gave them value or return the funds back to us.
So I’m going to stop there. Any questions about that process. All right, I’ll take that as a no.
All right, let’s talk about altered checks.
First of all, what’s an altered check? The alteration is defined in UCC 3-407 an unauthorized change in the check that purports to modify in any respect the obligations of a party. It could be the unauthorized addition of words or numbers or other changes to an incomplete check. For example, I recently heard this one, which always surprises me that people do this, but they do, a guy wrote a check or rather signed a check and gave a blank check to somebody and then there were changes made to that. And I think actually that check was incomplete and there was additions of words and so forth. So that’s an alteration. Or I write a check to Nikki for 10 bucks, and she adds a couple zeros behind it and then gets a thousand bucks for it. That’s an alteration.
All right. So when you are the paying bank and your customer tells you that they wrote a check for something to a certain payee for a specific amount but it paid for a different amount and/or to a different payee, you have a breach of warranty on the part of the depositary bank. And again, there’s no adjustment process. And remember we talked about that while that warranty lives in UCC which has a three-year statute of limitations that is further limited by UCC 4-406, by what’s called, referred to sometimes, as the statute of repose, which I was kind of like that one, which says the customer has a duty to examine its statement. And if it does not report within one year after getting that statement to discover that alteration, they are precluded from asserting against the bank that alteration. Now remember that timing may be varied by agreement and frequently is, so if your account agreement says, you must notify us within 60 days of getting the statement and they tell you on day 90, your terms of your account agreement prevail and they are precluded from making an assertion against you, the paying bank.
Again, unless that check paid yesterday, you don’t return it. And because this is a warranty breach, an altered check warranty breach, you don’t have an adjustment avenue. What do you do? So remember, first that you’re going to need to reimburse the drawer’s account because UCC says a bank may pay, charge against its customer’s account, a check that it’s properly payable, which means authorized by the drawer. An altered check is not a properly payable check. So you reimburse your drawer, your customer. And now you, the paying bank, has deal directly with a depositary bank. Again, get a written statement of alteration from the drawer, a copy of the check, the image as it was presented front and back, and you do the same thing. You send a letter to the depositary bank, saying the breach of UCC presentment warranty. Here’s a sworn statement from the account holder. Here’s a copy of a front and back, which clearly shows the alteration. So, honor your warranty. Now, the timing for a bank to honor its warranty is not defined in UCC or reg CC. It’s simply imposes on that bank the obligation to honor the warranty, and the bank that draw drags its feet in honoring its warranty or responding to a warranty breach claim is not meeting the terms of the law or the Federal regulation. So sometimes you have to lawyer up and send them a threatening letter. If you don’t honor your warranty, we’re going to take you to court and force you to do so.
Any questions about alterations before we get on to forgeries and counterfeits?
All right. I’m going to take that as a no.
Oh, here’s a question. If that just disappeared, Nikki, can you read that for me? Sorry. It just popped up. So if the BOFD receives a claim for an altered check, are they obligated to give the paying bank the full amount of the claim if the funds are not available or is a rule 9 claim, if exchange through ECCHO, the only way for BOFD to disclaim. That’s a very good question.
Remember I said earlier, that the warranties that we looked at are not conditional? So the depositary bank cannot say to the paying bank to whom it made that warranty that that check is not altered. I’m going to take a loss because my depositor’s account is empty. They can’t do it. It’s not a conditional warranty.
So with altered checks, the answer is no, the depositary bank can’t do that. And if they stonewall and say they will or because they’re they can’t recover. They’re not going to take that loss. That’s when you have to lawyer up. Now rule 9. We’re just going to get into that right now. So good timing you set me up. Perfect.
All right. So when a check is presented through the Fed, this warranty prevails. The warrantor has no knowledge that the signature of the drawer of the draft is unauthorized because how would the depositary bank know the drawer signature if it’s not drawn on them? They won’t know. They can’t know that. So they make no warranty to the paying bank. So when you’re paying bank and you get a check presented to you through the Fed and your customer calls you a month after thatf check paid and says, it’s a forgery. You have no recourse, no legal recourse. That’s important to understand.
Now if you got it through an ECCHO exchange, we’re going to talk about that. So you learn that you charged the forged or counterfeit check against your a customer’s account. Remember that UCC 4-401 says you can only charge a customer’s account if that check is authorized. So, a forgery or a counterfeit] is not authorized. You can’t charge your customers account that, for that. That means that without any recourse, the paying bank takes the loss. And, if that check did not pay yesterday, you can’t return it for any reason. There is no provision for a late return because the check is quote fictitious.
A check has to be returned within the UCC midnight deadline and the reg CC expeditious return requirements. Again, I’m going to emphasize that. Came in yesterday. Has to come up and go out of the shop by midnight tonight. So, it’s back to the depositary bank tomorrow 2 o’clock their time, each of those days being business days. However, there is one possible avenue of recourse. First off, if you get that forgery or counterfeit notice from your customer, the first thing you want to find out is, did I get it through the Fed? If I did, we just talked about that. There was no warranty made. So, paying bank, you got to reimburse your customer and you don’t have any recourse. If you got it through an ECCHO-governed exchange, there’s something called rule 9, which does a 180 on that warranty that we looked at that the depositary banks says, I have no knowledge that the drawer signature is not authorized. Rule 9 is for ECCHO-governed exchange that the check has to go through a private exchange, not touch the Fed. And rule 9 basically says the depositary bank warrants that it’s not a forgery, not a counterfeit.
So this is for ECCHO members-only; the depositary bank has to be an ECCHO member. The paying bank has to be an ECCHO member and that check needed to presented through an ECCHO-governed exchange. Not through the Fed. The depositary bank didn’t send it through the Fed, the paying bank didn’t get it from the Fed.
So again, rule 9 was developed by the members of ECCHO to try to find a way to deal with forgeries and counterfeits that were reported too late to return. It provides an avenue of recourse. It’s not guaranteed, but it provides a way to attempt to recover. So again, rule 9 is only available for in ECCHO exchanges and the rule, the ECCHO rules do permit members to opt out of rule 9. Meaning, they don’t have to receive a rule 9 claim or honor it, but they can also not make rule 9 claims and there’s about 14 banks that have actually opted out. You can find that list on our website.
What this does is it says, yes opting in. We have about seven minutes left, eight minutes, Perfect. All right, what this does is shift liability to the depositary bank, if they still have the funds. So, here’s what rule 9 says, the depositary bank warrants that it is not a forgery, not a counterfeit, and they are liable to the paying bank, if the paying bank makes the claim timely, and if they still have the funds, which relates back to that earlier question. In a rule 9 claim, the depositary bank may disclaim that rule 9 claim if the depositor’s account is empty.
So it is an potential avenue of recourse, but it’s kind of a Hail Mary pass, is how I look at it.
All right. So, there are time frames. Your customer has to notify you within 60 days of getting the statement. When they notify you, you have 15 days to make the claim. If you don’t send a written statement with that claim and the depositary bank wants it, they have 15 days to ask for it and you have 15 days to respond to it, etc. So, if you’re making a rule 9 claim, do an end run around that and always include the written statement.
So, as I said, it provides an avenue of recourse and the depositary bank has to reimburse the paying bank if they still have the funds and that claim was made timely. So, always, first determine did you get it from the Fed? Or did you get it through an ECCHO exchange?
All right, let’s look at that last warranty. Remember I said it lives in UCC about RCCs remotely created consumer items and then reg CC up that one and says any remotely created check is warranted by the depositary bank to be authorized in the amount and to the payee.
Now, what’s a remotely created check? That’s defined in reg CC says, it’s not created by the paying bank and doesn’t bear the signature of the drawer. So it looks something like this. You’ll see in the drawer signature area that it was verbally authorized or something like that. When I sat in your chairs and got all those calls about fraud, when I bring up the image and I saw one of these. Yay, I have recourse. I want to point out to you that. There’s a field to the immediate left of the routing and transit symbol. That’s called the external processing code. This field is an optional field, but the number six has been designated for RCCs. So if you have a customer that’s creating RCCs and depositing them with you, first of all, you need to know that you do not want to be an avenue for fraud. You could require them to populate that EPC field with 6 so you can programmatically track that. Now, you find out about an unauthorized remotely created check. Again if it paid yesterday, you can return it. But if it didn’t, this is one of these warranty breaches that actually has an adjustment available to it. If you got it through the Fed, it’s called an URCC WIC, stands for unauthorized remotely created check warranty indemnity claim, and you can do that with entry for up to 150 days from the presentment date. Yes, later date of that check, you do need an affidavit from your account holder that that RCC is not authorized.
The FED changed that timing from 90 days to 150 days because of the pandemic. You have to get that statement and remember that, that warranty was made in reg CC, so it has it lists for one year, ECCHO exchange is still 90 days.
I turned on the speed there. Any questions about remotely created checks? Any questions about anything?
Clear as spring water, right? That’s it, we have clearly have a knowledgeable audience today, so accent, excellent.
So I’m going to show you a couple of links reg CC is of course, a Federal regulation. So it’s not going to be a simple link, right? You can go directly to the electronic code of Federal Regulation, ecfr.govand search it out, or you can go to law dot Cornell. edu.
For UCC for Uniform Commercial Code, the model. You can also find reg CC a version of that. They host that as well as more generic, but it’s good to have those access. And if you’re an ECCHO member, you have access to the ECCHO rules. So do take full advantage of those. Save these regulatory references to your favorites so that you have access to them whenever you need them.
And you can always go to our website. When you’re an ECCHO member, you have access to our education site. There’s no additional fee to access our various educational library components, and you can always give me a call. If you’re not an ECCHO member, I’m happy to talk to you about this particular session. If you are an ECCHO member, I’m on call for you. And this is how to get hold of me. Thanks for your time, everybody. If you have no more questions, we’ll call it a day.
Fantastic. And thank you Dal for your time as well. And we will resume again next week with a different session, different topic. I did update the dates in your email that I provided out today. So if you have any questions reach out to myself or to down and have a wonderful afternoon.
Take care, everybody.
ICL – Depositary Bank RDC Risk: The RDC Indemnity and Holder in Due Course
ICL Depositary Bank RDC Risk: The RDC Indemnity and Holder in Due Course
I hope that this has been five times you’ve gotten to hear my voice. And you notice, I don’t have my camera turned on.
So, today, we are going to talk about the risks involved with being an RDC depositary bank. We’re going to talk about the risks of being a paying bank when you run into the inevitable duplicate, and we’re going to talk about something that is sometimes very confusing to some people. I know it was the very first time I heard it, is holder in due course, so let’s get started.
First, I want to remind you again, as always, I’m not an attorney and not giving you legal advice. In certain specific circumstances, you want to consult legal counsel, compliance, make sure that you’re taking the appropriate action. But I’m going to give you all of the ammunition you need, the regulatory references and the state law, the UCC, so that you know where it says that and you can take the appropriate action. As always, we’re going to start out by reviewing the legal framework, which you guys already know, I hope, by heart.
We should have a test at the end of this, I think. We’re going to talk about the depositary bank risk and the RDC indemnity and then we’re going to look at the holder in due course and considerations to make when you’re a paying bank and you detect duplicates.
So again, just to remind you that check is governed by two bodies of law. The first being state law, Uniform Commercial Code adopted by each state, and it does vary from state to state, although articles 3 and 4, which are specific to check, are pretty uniform across the board. So, you do want to know what your state’s version is and bang articles 3 and 4 or favorites because there is a wealth of information there for you. We’re going to be, today, talking mostly about regulation CC, where you’ll find the definition of electronic check. You’ll find the Expedited Funds Availability Act, and you’re going to find the warranties and indemnities, which is what we’re going to focus on today.
So let’s look at those warranties to remind you again. These are things that if you have these memorized, you can think yourself out of just about every kind of situation that’s going to come up. And those warranties are not long and complicated. They’re very straightforward. There are presentment warranties that live in both articles 3 section, 417 and article 4-208 of UCC, and fairly straightforward. The presenting bank, which is always the depositary bank who originally takes that an accepted check and presents it through collecting banks to the paying bank, says, I am entitled to enforce this. So, essentially, they bought that debt from the payee. And they made sure that they gave credit to the payee and they warant that they’ve done so. They also make a warranty that the check is not altered and remember that UCC was written for paper check. We used to always only take paper checks. So the depositary bank was in the best position to know if a check was altered; they’re looking at that piece of paper and they can tell if it’s crossed out, changed acid washed, all of that stuff, and that warranty lives even though we are not always and probably mostly not accepting checks in paper form anymore.
Now, the depositary bank is not in the best position to know the drawer’s signature unless that check is drawn on them. So, any check that is not drawn on them, the depositary bank isn’t going to know the maker signature, the drawer’s signature. And so, they say in that presentment warranty to the paying bank that we have no knowledge that the signature of the drawer is unauthorized. Now, you’ll notice we talked about rule 9 previously, which is a rule for ECCHO exchanges, which does a 180 on this UCC presentment warranty. So, you do want to know if you’re a paying bank and you got to check that was forged or counterfeit, did you get it through the Fed? If you did, this warranty prevails and you have no recourse against the depositary bank.
We’re also going to look at reg CC and I gave you the reference here. It’s the no double debit warranty, we call it sometimes, because you’ll notice it doesn’t use the word duplicate. What it says is, no person will receive the transfer, presentment, or return, or otherwise be charged for an electronic check or an electronic return check, the original check, a substitute check, or a paper or electronic representation of a substitute checks such that the person will be asked to make payment based on a check it has already paid. In other words, nobody’s going to be asked to pay the same check twice.
So understanding that, when you’re an RDC depositary bank, you’re making those warranties, but RDC presents new risks; you don’t receive the paper, but you’re still making the presentment warranties we just talked about.
When you get a check, you don’t have the opportunity when you get it through RDC for a deposit, you don’t have an opportunity to examine that physical paper, which makes it a little bit more difficult to determine if a check is not altered, but you still make that warranty. You still make the warranty that you are entitled to enforce, even though you can’t identify the person who is depositing the check, although with good RDC practices, that check is going into the payee’s account. And you want to make sure that whatever terms of endorsement you apply are met, such as restrictive endorsements – and we’ll talk about that in a bit – and you want to make sure that it’s valid. In other words, if the check is payable to your depositing customer as your depositing customer-endorsed it, if it’s not payable to your depositing customer, what’s the deal? Is it a check that bears a special endorsement? Okay, endorsed by the payee and made further payable to your depositor, understanding that your risk in such a thing, whether it’s in paper or remote deposit, you can’t verify the validity of the original payee’s endorsement. So that’s just a risk that you, that all banks take whether they accept a check with a special endorsement in paper form or RDC. And then the duplicate warranty is the one that really prevails in this scenario. You don’t get the paper item, but you are making that duplicate warranty and it’s important to understand that every bank that presents an image or to a paying bank makes this warranty. The greatest number of duplicates that I have heard of where someone had eight different bank accounts and deposited the same check at eight different banks. Every one of those banks that presented those images to the paying bank made this no double debit warranty. So, the big risk in RDC is that the paper is controlled by the depositor and the risk of them playing games, cashing that paper check at a check casher or depositing that paper check at another bank.
You can’t emphasize it enough. Every bank that presents a check to a bank, paying bank makes that warranty that no one’s going to be asked to pay the same check twice. Every depositary bank says, I am entitled to enforce, and what this means is with the RDC indemnity, the depositary bank risks an indemnity claim if another bank received the paper and suffered a loss because that was adjusted or returned back to them as having already been paid.
So, the purpose of that indemnity we saw that rise exponentially when RDC began to be universally adopted, particularly for consumers. We were seeing losses that occurred at depositary banks that took the paper check thinking I got the paper check, it’s cool, but it would come back to them as having already been paid, either as a return or adjustment and when they try to recover from their depositor, guess what? Their depositor’s account is empty. So that’s really why this indemnity was made and why it is something that everybody wants to be aware of, it’s to protect that bank that takes the paper check from a loss when it comes back as having already been paid and that means whether it’s returned timely or whether it’s adjusted. And the principle here is to encourage RDC banks to implement good RDC deposit practices. And we’ll talk about some of the ways to mitigate that risk. You’ve heard me say this before. I think you do not want to give RDC service to a customer just because they walk in the door, just because they have a pulse. Remote deposit capture is a risky service, and you want to make sure that you mitigate the risk. So, the RDC indemnity addresses the risk that the customer retains the original check and either intentionally or mistakenly deposits that paper check at another bank that RDC bank’s potential liability rises as we have spoken because it permits the customer to truncate the original check.
So here’s the text and I always notice these things when I’m doing the presentation. All of these regulatory references that you’re seeing here are in reg CC. So the RDC indemnity text is here. It says it is provided by a depositary bank, that is a truncating bank because it accepts the deposit of the electronic image, even though it doesn’t get the original check, it’s still called the truncated bank and is responsible for that check. It hasn’t received the original check. It got paid for it by the paying bank. It was not returned back to them as having already been paid under those scenarios that bank indemnifies a depositary bank that accepts the original check for deposits, for deposit, for losses that are incurred by that depositary bank if the losses due to the check having already been paid. So, what that that means is that depositary bank that took that paper is that check is returned, NSF, this indemnity does not apply. It applies if that check comes back to them as having already been paid.
Now there is an exclusion to that because if that depositary bank that took that paper check, took it and it that original check bore a restrictive endorsement inconsistent with the means of deposit, it can’t make the indemnity claim. For example, if that paper check border restrictive endorsement that said for mobile deposit only, or better yet, for mobile deposit to XYZ bank, and ABC bank takes that paper check, they’re not covered by this indemnity.
But let’s take a look at endorsements. You’re going to find those identified in UCC article 3, section 205 and 206. There are four kinds of endorsements that are described. First is called blank. That doesn’t mean there’s no endorsement. It simply means that the payee endorses with their name only and that becomes a bearer instrument with that endorsement. The special endorsement we talked about at the beginning is an endorsement that it identifies a person to whom the check is payable. So, for example, a check is payable to me. I endorse it, and then I make it payable to Nikki. That’s a special endorsement. Nikki comes into your bank or deposits that through remote deposit, you verify that it’s going into Nikki’s account, so that you can honor your warranty that you’re entitled to enforce, but the risk to you is that Nikki may have forged my endorsement. Unless I’m standing there with you, with Nikki, when she passes that in paper and you can verify my endorsement, a special endorsement is a risky thing. This is where you have to know your customer. We talked about anomalous endorsements in the past, where it’s endorsed by someone who is not the named payee. And that is most common with business checks, where the check is payable to ABC company and it’s endorsed by Fred Jones, CFO. Excuse me. That doesn’t mean that it’s not a legal endorsement. It just simply means someone other than the payee endorsed that. Now, some banks might call checks that come in with that kind of endorsement an irregular endorsement and they send it back if they catch it in time to return it, but just understand that your regular endorsement is not a thing. It’s not identified in UCC. They talk about anomalous endorsement and was the perfectly legitimate, kind of endorsement, it does beg the question: Why would someone do that? Because they really need to endorse as drawn and where it’s important here is depositary bank should encourage their customers, their depositing customers, to endorse has drawn to avoid any confusion. If endorsements are looked at by the paying bank or the drawer. And then the last one, the restrictive endorsement, that’s particularly germane to our conversation today and that’s where an endorsement limits the payment, or the negotiation to a particular condition. We most commonly knew restrictive endorsement as for deposit only so that check can only be deposited when it bears that kind of restrictive endorsement.
So let’s go through the terms of the depositary bank to receive the indemnity of it, if it accepts the paper, it has to have gotten the original paper check. So it’s not an image, it Bart. I’m sorry. It has to have gotten the original paper check. It doesn’t mean that it has to send the paper check to the paying bank. It has to have received the paper check for deposit. And again, if that check bears a restrictive endorsement that is contrary to the terms of the negotiation, then they’re not going to be able to make that indemnity. And here’s where, if you say to your customers when you’re an RDC depositary bank, we want you to put for deposit only on the back of that check. Well, if that paper check is taken into another bank and deposited that bank honored that restrictive endorsement because it wasn’t restrictive enough. That’s why you want to say, put for remote deposit only or for mobile deposit only on that endorsement. So that if the bank that takes that paper check, takes it over those terms there, where it says, for mobile deposit only. It is not going to be able to make an indemnity claim.
Now that paper depositary bank has to suffer a loss. Which means the check came back to them as having already been paid and they could not recover from their depositor. That’s an important component to understand this indemnity does not indemnification. The depositor, it indemnifies the depositary bank who took that check or deposit. And it does not indemnify other banks and the collection process. It’s really between the RDC depositary bank and the paying bank and the paper depositary bank.
So what are the indemnity amounts cover? The cover, the amount of loss up to the amount of settlement. Which means the amount of the check. If you have to fight to recover, then there might be additional costs that the indemnity will provide such as interest, reasonable attorneys fees, court costs, that kind of stuff.
Now, how do you determine when you are that paper depositary bank and you got that check back as having already been paid? How do you determine who the RDC depositary bank is, they got this through a Fed exchange. There’s an ITYP called INFO. You send that into the Fed, and they will tell you who the RDC depositary bank is, and you have to do so within one year of that return or adjustment. If it’s an ECCHO-governed exchange, the adjustment type is called source of receipt item identification. So you’ll send that in to learn who the depositary bank, the RDC depositary bank, was.
So, I’ve been going on here. Do we have any questions so far?
So far no questions.
All right. So let’s look at how this works. Here we have our famous Mr. Blue Guy. He’s an RDC customer. He has RDC service with BOFD A. He deposits an image of that check at BOFD A and the image is presented to the paying bank and paid and then indemnity then applies to any other bank that takes the paper check, which in this case is the BOFD B. where Mr. Blue Guy has an account. He goes in, deposits at paper check with a blank endorsement. Remember blank endorsement says that the payee simply endorsed it, so he endorsed it. Mr. Blue Guy. And that was it. Depositary bank took that check, gave credit to him. Excuse me. Just a second. Sorry about that.
And the paying bank gets that image of that check and says, hey, that’s a duplicate. So, they returned it. Depositary bank, as they do with all returns, are going to charge it back to the depositor except, whoops. No money in that depositor’s account. Now, they have suffered a loss. That’s when the indemnity applies or that’s when the identity claim is going to be made. So, depositary bank A is going to be obliged to return the funds back to depositary bank B.
Now, if that paper check has a restrictive endorsement. How does it work? Same way? Only depositary bank B dropped the ball, that paper check bore a restrictive endorsement. It said for mobile deposit only or maybe for mobile deposit only to be OFDA. They should not have accepted that check. They get that returned as a duplicate. And they can’t recover from Mr. Blue Guy’s account. And they think that they can make a claim. Now, here is something I should emphasize if you are a depositary bank who took a paper check and you make that indemnity claim, you want to include with that indemnity claim a copy of the check as you accepted it, front and back. The depositary bank A says there’s a restrictive endorsement. You are excluded from making an indemnity claim to us or we’re going to disclaim.
Still, consider some deposit agreements, considerations, when you are offering remote deposit capture service to your customers. Add some indemnity language that says, customer, if you duplicate this check, you’re going to be responsible. Consider requiring a restrictive endorsement, and the more restrictive you make it the better. We talked about if you put a restrictive endorsement for deposit only, that’s not going to protect anybody, other than it’s not going to be cashed. But if somebody deposited in another bank, they’ve honored that restrictive endorsement. So that restrictive endorsement asked to restrict the means of deposit to mobile deposit only, and if you add to the depositary bank, you’re being even more restrictive. So if it says for mobile deposit to XYZ bank and ABC bank is presented that paper check, they’re going to look at it and say, go away.
Consider also that you want to restrict certain types of checks from remote deposit. There are some greater risks for certain kinds of checks. For example, U.S. Treasury checks. I think I’ve said before that a U.S. Treasury check is a lot like a hundred-dollar bill. It bears all kinds of counterfeit detection devices. There’s microprinting, ultraviolet light detection, that kind of stuff. When a bank presents a U.S. Treasury check to the Treasury, they don’t make warranties, they make guarantees, which is essentially the same thing in 31 CFR 240, which governs the presentment of checks to the Treasury. And among those guarantees is that the depositary bank has made every effort to determine that that check is not fictitious. When you accept a Treasury check through RDC, you can’t do that.
Another check that is frequently used for fraud is U.S. Postal Service money orders. There are also detection devices there. Although there are ways for you to confirm whether or not a U.S. Postal Service money order is legit by calling certain numbers.
So, you definitely want to have heightened due diligence if you are accepting those through RDC. Another thing to consider is, do you want to accept an RDC through IRD through remote deposit. That’s a check that has already been returned back to the depositor. You dropped it to a substitute check. Now, do you want to accept that for deposit through mobile deposit because you still got that dishonored check in his hand? And that’s something you want to consider.
So, when we look at offering RDC service to our customers, consider the length of time that person has been a customer. What’s the history of their account activity? What kind of credit history do they have? The same kind of due diligence you would have for opening an account, you want to apply to offering RDC services, again consider enforcing a restrictive endorsement that is truly restrictive. Establish controls to review the RDC deposited items, and the higher the volume, the more of a challenge that is, so again, know your customer. If you’ve done this upfront due diligence on this customer, you should have reasonable belief that they’re not out to scam you, but consider reviewing the endorsements and rejecting items that do not bear the restrictive endorsement, with the full understanding that you might see that restrictive endorsement on the deposited image, but it’s not actually on the physical piece of paper. We know the scam. I take a picture of the front of a check. You require me to put a restrictive endorsement on the back of it. So, I take a picture of a back of a piece of paper that’s the same size of a check, and I put that restrictive endorsement on that piece of paper, but the actual check ends up not having the restrictive endorsement on it. And that’s an important thing. If you’re an RDC depositary bank and you get a claim and RDC indemnity claim, you don’t want to just summarily reject it because you see the restrictive endorsement on the image that you accepted. It’s all about is it on the paper? And consider also establishing daily and weekly deposit limits, the number of Items, the amount of the total deposits.
Do we have any questions so far?
All right, you guys are good. All right. Let’s talk about holder in due course. That’s defined in UCC 3-302.
Now, the holder, remember, we talked about, is the person with the check, payable to them or payable to a bearer. Now that they have taken that check to, let’s say, a check casher. That check casher, if they took that check for value in good faith, without notice that the check is overdue. And I’m going to stop there. Overdue is defined in UCC as greater than 90 days from the issue date. It doesn’t mean the check is not negotiable. It just gives it a different legal status. If that check is greater than 90 days from the issue date and that check casher takes it, they do not qualify for holder in due course status. If that check has been dishonored. for example, it’s an IRD and they cash it, they do not meet the requirements to be holder in due course, so it’s important that everybody understand the criteria for being a holder in due course.
Now that party that took that paper check for value in good faith. It wasn’t overdue, it hadn’t been dishonored. They have no notice that that check contains any unauthorized signature, and they can see it has not been altered. If that check was altered and they accepted it, they are not qualified as holder in due course. And without notice of any claim to the check or that any party has a defense or a claim. So consider this. If I walk into a check casher with a piece of paper check, and I’ve got a restrictive endorsement on the back of it for mobile deposit only, and that check casher cashes it, they have noticed that another party has claim to it. So again, they’re not going to qualify as holder in due course. So, the holder can enforce the check against the drawer. So I write a check to Nikki. Nikki can enforce that check, enforce me to pay it. The way she does it, is she presents it, she gives it to her bank, who presents it to my bank, because I’ve made an order to them, my bank, the drawee bank to pay it. Remember that a check is an unconditional order to pay. So I’ve ordered my bank to pay that. If there are no funds in my account and it gets returned back to Nikki as NSF, she has a legal claim against me because I wrote her a check that was dishonored. So that party that met all of these terms and get that check return back, they can enforce that check against the drawer, and that’s where you want to be aware of the risk when you have duplicates. So it could result in the drawer paying the same check twice. The drawer did nothing wrong. They gave it to somebody who stole from them, essentially.
So here’s my favorite example, A guy walks into a bar cashes, the check. He’s the holder.
The bartender cashes the check for him and sells him a couple of beers. That bartender is now holder in due course because he essentially purchased the debt, the holder, the drawer wrote the check owed the holder money and rather than the paying bank that bartender gave the payee that money. So now that bartender, if you met all those criteria that we just talked about, is holder in due course. And that legal status applies when he took that check and accept and met those criteria. It does not, it is not in evoked when the check has returned. But he’s going to act on it when it is. So here’s the check is returned. He’s not happy. Now, why doesn’t he go after the holder? Why doesn’t he go after the guy, who went with the pot on his head? Well, he could, of course, he certainly could. But remember that guy’s a moving target. He walks into a bar. He cashed a check. The bartender took a risk by cashing the check knowing that if this check comes back to me, NSF, payment stopped, account closed, whatever, I can enforce this check against the drawer, the person who wrote the check.
So, again, the holder is the person in possession of the negotiable instrument, payable either to bear, which is not very common these days, or to a specific person who has that possession.
So he took the check in good faith for value without notice that it was overdue or dishonored, without notice that it was altered, and certainly without any notice that the signature was not authorized, and without knowledge of any claims against it. He doesn’t see a restrictive endorsement or any other things that would say that someone else has a right to that check.
So basically, what it means is that financial intermediary such as a depositary bank, a collecting bank, a check casher, or a grocery store, a liquor store, whoever cashes checks or for anyone, should not be affected by disputes between the drawer and the payee of the underlying transaction. Remember that you write a check to someone because they did something for you. And that person to whom you wrote that check cashed that check, but you put a stop payment on it or you don’t have enough money in your account or you wrote him a bum check, that party that accepted that check is not the party that should suffer the loss. And that’s really what holder in due course, is all about. It permits that party to make the claim and force the drawer to pay it.
So, the drawer as we talked, means the person who signs the draft in orders of payment. The holder in due course is the person who cashes that check and assumes the debt, right?
So what do you do now? Here’s how I first heard about holder in due course.
I got a call. I was at a bank and I got a call from a check casher who said that, that we had returned to check stop payment back to them and he is holder in due course. He’s going to make us pay it. What are you talking about?
Well, I learned a little bit more about holder in due course, but what I learned is that the paying bank is not the drawer, the paying bank is not the party who orders the payment. The paying bank is the party who is ordered by the drawer to pay it. So the paying bank is not subject to the holder in due course claim. The drawer is. So what do you do when your account holder is getting demands for payment from a holder in due course? And those holder in due, course, check cashers, they know how to send letters that are threatening and they’re going to freak out the drawer. And what the drawer did was put a stop payment on a check and that’s what’s really important. Stopping payment on a check does not cancel the obligation of the drawer because it is a dispute between the drawer and the payee doesn’t mean that, by putting a stop payment, all the legal obligation goes away. So, that payee or the party that, now this is important, that payee can be holder in due course, because they accepted that check in good faith for value, right? The exchange something, they gave you a motorcycle for it, whatever that party can be holder in due course. The payee and the drawer in the holder in due course, have to resolve this outside of banking channels. And that usually means in court or the threat of civil litigation.
So, here’s a perfect example. Mr. Blue Guy again. He buys a Rolex from a salesperson, and he writes him a check. Salesperson deposits that check was his bank. Mr. Blue Guy realizes he bought a copy watch. It’s not a Rolex. So, he puts a stop payment on it. Paying bank returns it. Goes back to salesperson’s bank, who charges it back to salesperson’s account, but no money in salesperson’s account. What happens next? Here’s where the depositary bank can actually pursue the drawer and say I’m holder in due course. Hey.
So the depositary bank, in this case, they took that check in good faith for value without notice that it was overdue, without notice that anybody had a claim to it. They met all those conditions, they’re holder in due course.
So again, the depositary bank can be a holder in due course. Depositary banks don’t generally invoke that. They usually go after their depositor because they have an agreement with them, but they can if they met all those criteria.
So how is it a good thing? The holder in due course is protected from a dispute between the drawer and the payee. The financial intermediary has legal recourse. And the risks to the drawer is that they are not released from their obligations.
When there is a dispute between the drawer and the payee or they are unable, the paying bank was not able to pay it because there were no funds in the account.
I’m going to stop there. Are there any questions?
I’m going to get off from you, but not currently. There are not any questions, okay?
All right. So let’s look at where duplicates come into play here. And I apologize. I have a frog in my throat. So, bear with me here.
So here we have depositor who makes a mobile deposit to BOFD A and the electronic check is sent to the paying bank posted to the drawer’s account. He goes and takes a paper check to a check casher, who met all the criteria that we just discussed and is now holder in due course.
That check casher doesn’t have to deposit the physical paper with a depositary bank to be holder in due course. He does it through remote deposit. Check image is sent to the paying bank close to the drawer’s account. The paying bank is notified by the drawer, hey, that’s a duplicate, or the paying bank detects that it’s a duplicate. And so what it does, this is a second presentment, which they say now that’s a duplicate. They return our adjusted back to the depositary bank who charges the holder in due course’s account, just like they would any other depositor.
Holder in due course now says I’m going to make a claim. They contact the drawer and they say, you gotta pay this or I’m going to take you to court and I’m going to ruin your credit and all kinds of threatening stuff in the letter. So the drawer realizes, he might talk to his attorney and realize they have no defense. So he pays the holder in due course claim. Now what just happened? The drawer paid that same check twice now. The drawer is not covered under that reg CC double debit warranty, no double debit warranty, but the paying bank obligated to reimburse the drawer because a duplicate item is not properly payable. We’ll talk about that.
So instead, they reimburse the drawer, and now the paying bank has paid that same check twice. Now, what they can do is go back to the first presentment, which was the RDC depositary bank and do an adjustment as duplicate. And that’s where it should have gone in the first place because the RDC depositary bank and a customer who was a bum and that guy was stealing from the drawer. And so it should go back to the account of that RDC depositor.
All right. So let’s walk through this, in words. A paying bank pays the same, the same check twice. It was accepted by BOFD a as an RDC deposit. It was accepted in paper form by BOFD B or by a check casher without a restrictive endorsement. The drawer’s account is charged twice.
The drawer makes the claim against the paying bank and the paying bank is obligated to reimburse them because in UCC 4-401, as we’ve talked about in the past, a bank, may charge its customer’s account for a check that is properly payable, meaning authorized by the customer, customer does not authorize that check to be paid twice. They were forced to pay it by the holder in due course, and they charged, they were they had to pay it when it was presented by the RDC depositor, eBay. So paying bank has to reverse them. Paying bank then suffers a loss there, but they can make the duplicate presentment warranty back to the RDC depositary bank.
So, here are some considerations when you are paying bank, and you detect a duplicate. Remember that the depositor of the paper check may have holder in due course rights. So if you have a duplicate detection system, remember that it detects duplicates. You don’t want to just automatically return the item that is detected as duplicate, even though that’s the easiest way. You should do some research.
Determine if you can see in the endorsement that one of those parties might be a holder in due course. For example, if you see one of checks that was presented to you as the paying bank and it bore a restrictive endorsement, for mobile deposit, only. That’s going to tell you that that was probably presented by the RDC depositary bank. If that endorsement says, ABC check-cashing company, probably don’t want to do that adjustment or return back to that party because that party may have holder in due course rights.
So what you really want to do is get that duplicate back to the RDC depositary bank, that debits the source that debits the depositing customer who caused the duplicate. And that debits the depositary bank who provided the delivery service that facilitated the duplicate. This is why RDC depository banks should really practice good, good RDC practices, develop good RDC practices, so that they know their customer.
And either duplicate check can be adjusted as paid. Remember that every bank that presented the check to the paying bank made that no double debit warranty. So if it came from the Fed, it would be a paid adjustment. If it came through an ECCHO-governed exchange, it’s called a duplicate.
All right, so let’s run through it again.
Remote deposit capture sends the item through the paying bank. Then a check casher presents that check or accepts that check from the payee deposit with their bank. The image of the bank is sent to the paying bank of the drawer. Our customer notices, sees, that the check was paid twice. Your customer tells you about it. What’s the best thing to do here? Whether your customer tells you about or whether your process detects a duplicate, what’s the best thing to do here? The best thing to do would be to get it back to the RDC depositary bank if you can tell. And you might not be able to tell by the endorsement. And it says RDC depositary bank. What the other endorsement may say ABC check cashing company. That’s the one you do not want to do the adjustment or the return. Get it back to the RDC, BOFD. That’s the best place to go. That way you can avoid all that drama of holder in due course and put your customer the paying bank’s customer through all of that. Threatening letters and so forth.
And, of course, I always want to remind you, that, if you are paying bank, you have a responsibility to return a check timely, which means that you return it. So that it gets back to the depositary bank by the second business day, following the banking day in which that check was presented to the paying bank. It’s a checklist for more than 5,000, you are required to notify the depositary bank, but the expeditiously return itself can serve as the notice. And always remember that the Treasury or any or U.S. Postal Service money order, or a check drawn on any unit of government are exempt from these expeditious return requirements.
All right. Do we have any questions?
So far, there are no questions.
Either that was too boring for words or it was crystal clear.
I think you were crystal clear Dal.
Hey, you guys, I really apologize for the coughing. I have a frog in my throat and that always starts just when I do a webinar but thank you for your attention. Thanks for participating. I hope this made sense and I hope that what you take away from this is, don’t rely only on duplicate detection systems to tell you that an item was presented that had already been paid. Don’t necessarily act on that second item, do a little investigation before you adjust or return, and that can save a lot of trouble. So, if you have any questions, here’s all the ways to get a hold of me. And if you don’t have any questions and thanks for listening.
Thank you, Dal. Thank you everybody for coming to the webinar today. We have one more next week, and we’ll talk to you then. Thank you.
ICL – Duplicates: The Never-ending Story
ICL – Duplicates: The Never-Ending Story
Perfect. Welcome back everybody for our last session. This one is really going to be pretty much of a review of the kind of things we’ve talked about, and hopefully the legal references and all of that stuff will be very familiar to you. We’re going to go through all kinds of scenarios that we’ve seen in duplicates, and duplicates don’t go away. Hey, that’s why we call it The NeverEnding Story. Although the Fed recently, periodically publishes the number of adjustments it handles and encoding errors have exceeded the paid adjustment error. So, that’s a cool thing. So, we’re back to encoding errors, being the most common kind of adjustment going through the Fed and duplicates have dropped down. So, maybe we’re making some headway.
So, first thing I want to remind you. I’m not an attorney. I’m not giving you legal advice and the scenarios that you’re going to see in this deck are hypothetical They’re based on questions that we’ve gotten over the years situations that we’ve seen some that seem really bizarre, but they kind of repeat themselves. Some of these might look familiar to you. But we try to address every possible kind of scenario so that you know how to act. And again, you want to make sure that in certain circumstances, you may need to consult your legal counsel to know exactly what to do.
Having said that, these are essentially the reviews that we’re going to cover today. We’re going to look again at that reg CC, no double debit warranty. We’re going to look at the RDC indemnity. We’re going to look at the paying returning bank warranty it makes when it returns checks. We’re going to look at different ways and different considerations for how to resolve duplicates. And then we’re going to kind of review again, what we talked about last week, how holder in due course can impact your decision as a paying bank when you’re deciding what to do with a duplicate. So, let’s review again in reg CC 229.34 (a)(ii), that’s where you’re going to find, the no double debit warranty and it does not use the word duplicate. And there are three warranties that live in this regulation, the first being that when you present an image of a check, or what reg CC calls an electronic check, whether it’s forward or return, you are warranting that it accurately represents all the information on the front and back of the original paper check. And also, it says nobody is going to receive the transfer presentment return or otherwise be charged for an electronic check or an electronic return check, the original check, substitute check, or paper or electronic representation of a substitute check, such that the person will be asked to make payment based on a check it has already paid and that’s an important warranty to remember. That applies to every single bank that presents an image to a paying bank, whether multiple banks are presenting the same image, everybody’s making this warranty. So that’s an important thing to remember in and this is an important regulation to have saved in your favorites.
So, what this warranty does, it protects a bank or persons from having to pay the same check twice. And I should say that in regulations and in UCC, when you see the word persons that really means entity. It’s not implying necessarily that it’s a flesh-and-blood individual. And the other thing that really needs to be understood is every bank that transfers or presents an electronic check makes this warranty. The warranties are made to everybody in the collection chain, including the banks and the depositing customers. The warranty is not made to banks outside of the collection chain; for example, when a bank presents a check to a paying bank, an image of a check, it makes this warranty. But it’s not making this warranty to any other depositary bank. Then we looked at the RDC indemnity text last year, hahaha, or last week and basically reviewed that the bank that truncates the check and sends on an image, whether it truncates it at the teller station or lets its customer truncate it and takes the image for a deposit, is a bank that doesn’t receive the original check but get settlement for it. In other words, it gets paid for it when it presents it to the paying bank and doesn’t get a return or adjustment back. That bank indemnifies a depositary bank that takes the paper check or loss incurred by that depositary bank if that loss is due to that check having already been paid. So that paper depositary bank gets an adjustment or a return of that check as having already been paid; that bank is indemnification by the RDC bank.
But if that depositary bank that took that paper check took it with a restrictive endorsement, that was inconsistent with the means of deposit, it is not covered by this indemnity. So, if you are a depositary bank that accepted a paper check, you have to meet four conditions. First. the RDC depositary bank has to be the truncating bank, didn’t receive the general check, got paid for it, and it wasn’t returned or adjusted back to them. So, they received settlement. The paper bank has to have incurred a loss. So, it could not charge back its depositor. Its depositor’s account was empty. Now, it suffers a loss, and it has to have the original paper for that it received the original paper for deposit. And again, that original paper check must not have a restrictive endorsement that is inconsistent with that paper deposit. For example, a lot of RDC depositary banks require their depositing customers to endorse the check that they are remotely depositing or remote deposit only, and it’s good to maybe make that even a little bit more restrictive for mobile deposit only to ABC bank. So if a paper check takes that paper check with that restrictive endorsement, they’re excluded from making this indemnity claim. We talked about restrictive endorsements, that’s defined in UCC 3-206. It limits the negotiation, essentially, of that check to a specific way, for example, for deposit only or for mobile deposit only; more restrictive yet, for mobile deposit only to ABC bank.
Now, we also looked at holder in due course, which is defined in UCC 3-302. And that’s the holder who has possession that took the item in good faith, took it for value, and without notice that the item was overdue, which means more than 90 days from the issue date, and without notice that it has already been dishonored. For example, it’s a substitute check. If any party accepts that whether it’s a check casher or another depositary bank, they don’t have holder in due course rights, and obviously they have to know, make sure that the check wasn’t altered, and they have no notice that the drawer’s signature is not authorized. And then without knowledge of any claims against it, an example of that could be that, in fact, the endorsement says for mobile deposit only, so it knows that there are potentially claims against that job. Now, holder is the person who is in possession of that negotiable instrument, and it’s either payable to them or payable to bearer that used to be a little bit more common to make checks payable to bearer, which meant that anybody who had the check could cash, it businesses would sometimes, if they wanted to have someone go cash a check for petty cash, would just make it payable to bearer so that the individual wasn’t the named payee but essentially write a check to Nikki and it’s payable to her and I give it to her, she is now the holder.
Now when the paying bank wants to return a check for any reason, it has to do so timely and when it does it, when it does return the check, it makes a warranty that it returned it timely. And there are two clocks that start ticking when the paying bank receives the check, when it’s presented to the paying bank, they have to, if they’re going to return it, get it out of their shop by midnight the day after presentment so that it gets back to the depositary bank by the second business day following the banking day in which the check was presented to the paying bank. So, when you look at this warranty, someone asked me this question, I thought it was an interesting question. it said, why does it say “or”? It warrants that it returned it within the midnight deadline OR within the reg CC expeditious return and the point really is that when the paying bank returns a check? It has to get back to the depositary bank by 2 p.m. the second business day following the banking day on which the check was presented. So, a bank may have an agreement where it delivers the returns directly to the paying bank on the second business day. So that’s the main point. And as we talked about in the past, those warranties don’t apply to Treasury checks, U.S. Postal Service money orders, or a check drawn on a state or unit of local government.
Are there any questions about what we talked about so far?
All right, so here’s a little graphic that you can just pull out of your handout and have it in front of you. It, what it does is really demonstrates the expeditious return example. Here, the check is deposited on Monday. So, Monday, that depositary bank sends it out in their cash later at night, gets to the paying bank on Tuesday, and the clock starts ticking. So, they post, try to post those checks on Tuesday night. Wednesday morning, the bank is looking at all of the NSFs, all of the unposteds, account not found, payment stop, that kind of thing. And they need to return them by midnight that night. That’s the UCC midnight deadline so that it gets back to the depositary bank on Thursday by 2 p.m. their time. Now if Tuesday’s a holiday everything gets bumped over one more day. So Tuesday’s a holiday. The paying bank gets it on Wednesday. They have to get it out of their bank on Thursday so that it gets to the paying bank on Friday. Okay, so this little visual can help you understand the return deadlines.
So, let’s look at some scenarios with duplicates. So, as we said, remember the reg CC no double debit warranty. Here we have an example of a check being presented by depositary bank A and also by depositary bank B. Which bank can the paying bank make the claim to? Either one, because remember, they all made the warranty. I sometimes get questions from a bank that says well, I deposited or I presented that check first. Why are they doing the adjustment back to me? Because every bank that presents a check to a paying bank makes that warranty that no one’s going to be asked to pay it twice. We looked about at holder in due course claims last time, a paying bank pays the same check twice. It’s accepted by BOFD A as an RDC deposit, and it’s accepted by in paper at a check casher or maybe a liquor store or something like that or by another depositary bank. And it doesn’t have a restrictive endorsement. That party, if they met all the requirements is now a holder in due course. So what happens, the drawer’s account is charged twice for the same check. The paying bank relies on that no double debit warranty. But it returns it back to somebody who has holder in due course rights. And then the drawer is forced to pay it. They are taken to court or potentially threatened to be taken to court. And now they paid that same check twice. The duplicate, or in this case, where they were charged for the first presentment, and then paid the holder in due course claim, they paid it twice. So that first check was not properly payable. Properly payable, means under UCC 4-401, authorized by the customer. Customer didn’t authorize and doesn’t authorize a bank to pay the same check twice. So, they say to the bank, I’ve had to pay this twice. Paying bank reimburses them, and they can make the no double debit warranty, the duplicate presentment warranty breach claim as an adjustment back to the other presenting bank. So, let’s look at how this flows. The depositor cash deposits a check through remote deposit to RDC depositary bank A, presents it to the paying bank. Then he takes that paper check and cashes it at a check casher, liquor store, grocery store, whoever cashes checks.
That check casher and this example doesn’t RDC deposits to depositary bank B, who sends it on to the paying bank as an electronic check. And typically, banks in their duplicate detection might just automatically return the second presentment. So, in this case, it went back to someone who had holder in due course rights. They met all the conditions of holder in due course. They had the paper and that was that check casher. So he makes the HIDC claim against the drawer, threatens them, the drawer pays it, and now they paid the same check twice. Paying bank reimburses that drawer, and they do what they probably should have done in the first place. Is the just it back to the RDC depositary bank. It’s not always obvious to a paying bank which is which, but we’ll talk about that. We have talked about that, but it’s always bears repeating, when that paying bank saw that duplicate, it was worth looking at the endorsements of both of the checks presented, to see if they can determine if one of them might have been a check casher. Keeping in mind that not everybody qualifies as holder in due course. For example, that check may have been accepted or cashed by a check casher or taken by a depositary bank on the 91st day beyond the issue date. In which case that check was overdue, and they don’t have holder in due course status. So when someone claims holder in due course status, do some research, make sure that they actually do. Make sure that that paper check they accepted did not bear a restrictive endorsement.
So, return or adjust, this is where research is important because the depositor of the paper check may have holder in due course rights. If the depositary or the paying bank adjusts the, really, the source of the duplicate, gets it back the RDC depositary bank, that’s really where you want that duplicate to go back to because that RDC depositary bank has a customer who caused the duplicate. Their customer stole from the drawer, and that’s where you want it to go back to. If that RDC depositary bank can’t recover from their depositor, that’s their loss. They gave RDC service to someone who shouldn’t have had it. And this sort of, this really mirrors FFIEC’s point of view from the very beginning of RDC. FFIEC is the Federal Financial Institutions Examination Council, and it consists of all of the regulators, and they basically made the opinion that the party that introduces the service that facilitates the fraud is the party that should be ultimately responsible. And that’s where the RDC indemnity really came into play. So, you remember that either duplicate check can be adjusted, as paid if exchange through the Fed or duplicate under the ECCHO rules, but it’s well worth doing some research. Maybe you want to present or return or adjust, rather, the first presentment because – think like a fraudster, if I am going to negotiate that check twice, Nikki writes me a check, I deposit it with my bank through RDC, and then later in the day, I go to a check casher, which one is most likely to be presented to the paying bank first? Probably, this is no science, but probably, the RDC depositary bank because it’s going to go out in their cash letter the same day they accepted it. Whereas the check casher may not be depositing that into their bank until the following day.
So, here we have it, [untelligible].
Speaker 2: We have one question here. Could check adjustment be done expeditiously by the second banking day, like a return?
Speaker 1: No! and that’s an excellent question. So, let’s go back to reg CC, when a depositary bank makes that warranty that no one’s going to be asked to pay the same check twice, that warranty lives for one year; reg CC has a one-year statute of limitations. So the paying bank may learn of a duplicate 90 days after it was presented, six months after it’s presented, 12, 11 months after it’s presented. It can do an adjustment up to or actually hold the depositary bank responsible for the warranty breach for up to one year. Now, adjustment platforms have timing. If you go through the Fed or through ECCHO adjustment, either one, both of them require you to do that adjustment within 90 days of the presentment date to get entry. That means you get credit right away. After the 90 days, you can do an adjustment without entry for, I think, a period of up to 150 days. And what that means is that sends a message to the depositary bank that they have to pay up. Or you deal direct and remember that the one-year statute of limitations. So that’s a good question. Any others?
It’s the only one so far.
All right, we have met Mr. Blue Guy, who is really not the kind of guy you want to give an account to, but both BOFD A and BOFD B have given this guy an account and BOFD A has given him RDC service. So, he deposits a check through remote deposit, then he takes that same check and deposits that at BOFD B in paper. Now, paying bank detects the duplicate, maybe because their customer told them that or because they have duplicate detection but before they automatically return this back to the second presentment or two, if they can determine based on the endorsement, that it’s the check casher. The best thing to do as we talk is get it back to the RDC depositary bank. That really is the source of the duplicate.
Now, I warned you, we’re going to go through some weird scenarios here. If Nikki writes me a check and now, I have her account information. I have her signature. I might just choose to counterfeit that check and maybe I’m not the smartest counterfeiter, so I use the same check number. So, I deposit that check through RDC. I take a picture of that physical check through RDC. And then I take a picture of another physical check, one of the counterfeits. And send that through RDC and then I do it three, four, or five more times. In paper. So I take, I counterfeit Nikki’s checks and I create multiple counterfeit checks. So are these duplicates? They’re not really duplicates because they are different pieces of paper. A duplicate is the same image of, of a single paper check that gets presented multiple times. So, the duplicate would be the images of one paper check. When multiple paper checks are counterfeited, for example, they’re technically not duplicates. So, what does the paying bank do in this case? Well, the paying bank isn’t always going to know that those were all separate paper checks so they may try to do a duplicate adjustment for example back to RDC depositary bank 1, who says, wait a minute, I have the physical paper here. They do it to RDC bank 2 and they say, wait a minute, I actually have the physical paper. So that can happen. There’s weird scenarios. So if you catch it in time, you would return it. If you got it through an ECCHO exchange, you could do a rule 9 claim. Or maybe they’re ECIs, which would be odd because well, ECIs aren’t eligible for exchange. Any questions about that scenario?
I should add, since we’re here and it’s a little bit different, you probably all seen situations where businesses issue checks and they might print them off by computer. They’re doing their accounts receivable, check payment printing and something happens in their system and they print the same check twice. They only mean to issue it once, but they are two physical pieces of paper with two made-payable to a payee and the check numbers are generally the same in that scenario. When those hit the paying banks, those technically aren’t duplicates because they are two physical pieces of paper. So anyway, keep that in mind.
Another scenario that I’ve heard about is a depositary or a paying bank, who received a check from another bank through RDC, charged their customer’s account, and then Mr. Blue Guy went into the paying bank and actually cashed the check. Is that a duplicate scenario? So when the paying bank discovers that they paid that duplicate, can they do a paid adjustment? And they really can’t because the point is there wasn’t, there weren’t two presentments of that check. The paying bank had already paid that check when it was presented by BOFD and then it cashed it again. Who is in the best position there to know that the check had already paid? The paying bank. So, it’s really worth double-checking that when your teller cashes a check, does your system do a search of that account history, to see if that check has already been paid. In that scenario, this is where the paying bank has a check that it had already paid and it’s going to take the loss.
So the RDC indemnity, we kind of walked through that before. Depositor deposits the check through RDC, and then he takes that paper without a restrictive endorsement in this example to another depositary bank where he has an account, check gets returned or adjusted back by the paying bank, has duplicate, they can’t recover from the depositor. Now, they can make the RDC indemnity claim because they accepted that paper check in good faith. There was no restrictive endorsement on it, and they suffered a loss because it was returned as a duplicate. And that is exactly an illustration of the terms of the RDC indemnity.
So let’s look at another example, where Mr. Blue Guy, he’s at it again. He deposited a check through RDC. Then he took the paper check to his other bank with a blank endorsement, and the paying bank returned it as duplicate. They couldn’t recover, they make the claim. Now, depository bank says, wait a minute. I see a restrictive endorsement on the image that we accepted for deposit. So can I disclaim this RDC indemnity claim? Well, that all depends. Remember that seeing that restrictive endorsement on the image that you accept, as an RDC depositary bank, is not evidence that the paper check itself has the restrictive endorsement. So you don’t just automatically disclaim it because you see the restrictive endorsement on the image that you accepted. What’s key is what does the endorsement or the back of the check of a physical piece of paper that the other bank took, does it bear a restrictive endorsement or not? We all know how fraudsters work. You require as a depositary bank that if you are going to accept a check through RDC, you want your depositors to put a restrictive endorsement on that check, but what they do is take a picture of the actual check and then instead of taking a picture of the back of that physical check ,which bears a restrictive endorsement, they that restrictive endorsement on another piece of paper that’s the same size and now it’s past your due diligence when you accept that RDC deposit and you say, yep, he met the restrictive endorsement requirements, when in fact, you were scammed.
Any questions about that so far? Going to take that as a no.
All right, so here’s an example where there is no restrictive endorsement, depositary bank makes the claim. Here’s an example where that that little scam that we just talked about happens. So, the depositary bank accepts the paper check. But it accepts it with a restrictive endorsement. It says, for deposit, for mobile deposit only to RDC depositary bank. So, paper depositary bank should not have accepted that, it’s adjusted back to them and surprise, surprise! depositor’s account is empty. So, they think, I’m going to make an RDC indemnity claim. Now when making that RDC indemnity claim, you’ve got to include a copy of the check as you took it, front and back. So they make the claim RDC depositary banks as mm mm. There’s a restrictive endorsement on that paper check that you accepted. I’m going to disclaim it. And again, the point there is depositary bank should not have accepted that check with a restrictive endorsement that said for mobile deposit only to our RDC depositary bank. Paper depositary bank is not entitled to enforce that check. First of all, you should not accept that. So, that’s an important thing that you want to make sure your front line understands. Look at the endorsements on paper checks being deposited. If they bear a restrictive endorsement, that’s inconsistent with that paper deposit, don’t accept it, because if it comes back to you as duplicate your RDC indemnity claim will fail, and if you can’t recover from your depositor, you will take that loss. All right. So you are that depositary bank who took the paper. How do you find out who the RDC depositary bank is so you can make a claim against them? So that was exchanged through the Fed, you do an INFO ITYP. And what the Fed does is provides the depositary bank endorsement on the electronic image. So don’t use source of receipt. Instead use INFO ITYP. And to make that claim, you want to complete it. You want to do this INFO ITYP within 90 days of having gotten that paid adjustment. If you got this check through an ECCHO exchange, then you’re going to submit a source of receipt. So don’t do a Fed source of receipt. But if you got through ECCHO, then you, you do want to do source of receipt and what that, what that does is a paying bank will identify the depositary bank who received settlement and that’s an important condition. And again, the paying bank has to respond within 20 days to your source of receipt item. And then you make that claim, again, within one year of that return, cash letter date, remembering that reg CC has a one-year statute of limitations. So, we have multiple banks and this is not uncommon for the depositor to use multiple banks to cash, er, deposit the same check three or more times. In this example, the most I’ve heard of was 12, and I find that really amazing. So, depositor doesn’t RDC deposit to bank 1 to bank 2, bank 2, gets adjusted back. So bank 2 no longer had settlement. Now, he takes that paper check to paper depositary bank and that gets adjusted back as a duplicate. They can’t recover from that depositor. Who do they make the claim to? Well, they might try, you know, they learn from the use of the Fed or from the ECCHO-governed exchange that RDC depositary bank number 2 received settlement, except they didn’t receive settlement that was adjusted back to them. So the point here is, when you do that INFO ITYP or the ECCHO source of receipt, what you really want to know is who received settlement, who got paid for that item, and in this example, depositary bank 2 actually didn’t get paid for that item. It was adjusted back to them.
So let’s walk through this again, where the adjustment needs to go. The RDC indemnity claim needs to go, is to the bank that received settlement. Okay, I’m going to stop there. I think I saw a question pop up.
Speaker 2: Yeah, you did. So, it says, our vendor provides us with a cash letter report, that lists the bank of first deposit for each item. Should we take that as the true depositary bank, or should we still confirm through fed INFO ITYP I-TTYP?
Speaker 1: Hmm. That’s interesting. I’ve not heard of that but in the format of every electronic check that is presented, every bank has to identify itself as the depositary bank. So, if your vendor, your core processor tells you, okay, this check was presented by ABC bank, this check was presented by XYZ bank, then essentially, you know what you need to know in order to make that indemnity claim. That’s very interesting. That’s the first I’ve heard of that, but it makes sense. It makes sense because that information of the depositary bank is included with the check, but as I’m thinking about this, what that won’t tell you is who received settlement. So, for example, it tells you that you’re the paying bank. You got a check from RDC bank 1 and RDC bank 2 the same check. And, now] I’m sorry, you’re the paper depositary bank and your system tells you that the paying bank received these checks, not only from you but also depositary bank 1 and 2, but it won’t tell you if paying bank adjusted it back to RDC 2. So really the purpose of making doing that INFO ITYP or that source of receipt is to find out who got paid for that and that’s something that your system is not going to know. That makes sense. That’s a good question.
All right. I think we went through this already. All right, so when it comes to duplicates, your key takeaway is who can make the duplicate warranty claim, the paying bank that receives the the request that it has already paid a check. That’s the that’s the party who is provided the warranty, who makes the duplicate warranty every bank that presents a check to a paying bank. So again, it doesn’t matter the order. And in the examples that we looked at in some of the scenarios, it may be that as a paying bank, you want to make the duplicate warranty breach claim, the paid adjustment claim, back to the first presenter, not the second one, but you can do it to any one of the banks or all of them if there’s multiple banks. All but one obviously, you want to pay one. So, a depositary bank cannot make a warranty claim to another depositary bank. That’s another important thing to remember. The warranty begins with a depositary bank that introduced the check into the collection process. That’s every depositary bank.
All right. So when we talk about that RDC indemnity, remember that, that paper depositary bank has to experience a loss in order to make that claim. It can’t call a loss, its refusal to charge you back to its depositor. That’s not a loss. That’s an expense. So, if you are a depositary bank, you took that paper check, you got it returned as having already been paid, and you choose not to debit your depositing customer who may have the funds. Then you didn’t experience a loss. So that’s an important consideration. The RDC indemnity also applies to that depositary bank that took that paper check. It doesn’t apply to check cashers or other non-financial institutions that accepted that paper check. So, let’s say you bank a grocery store that also cashes checks, and you, they took the physical paper. They deposit it with you through remote deposit, you get that thing returned or adjusted back as having already been paid. And now, you charge it back to that grocery store. And that’s a loss to them. That’s not the party that receives this indemnity. It’s the, it’s the paper depositary bank. If if they deposited that paper with you, and it was charged back to you as having already been paid and you attempted to debit that grocery store who didn’t have any money, then again, you, the depositary bank, you are given that indemnity. But if they have the money in their account and you charge it back, yes, it’s a loss to them, but they are not the party that receives this indemnity. Okay, and again that restrictive endorsement cannot be on that physical check, if you’re going to make an RDC indemnity: claim.
Any questions about that before we go into reviewing holder in due course.
Speaker 2: So far, so good.
Speaker 1: All right. Now, we talked about the holder. You know, I write a check to Nikki. She’s now the holder. Nikki goes into her, local bar to cash it. And that bar cashed it, and he met all the terms of holder in due course. Now, essentially, what happens is that legal right to enforce that check went from Nikki to the bar. And that’s where holder in due course comes in. Now they have the paper and if they met all the requirements, they are holder in due course. So it’s important that, you know, all of those requirements that we talked about that are found in UCC 3-302. Because not every check casher, for example, I’ve seen this multiple times, who claim holder in due course rights, don’t actually have them because they didn’t meet all the conditions. So, it’s important to know when someone gets a holder in due course claim, you’re, for example, if you’re a paying bank, your customer will, got to make sure that they actually have holder in due course rights.
All right. That’s the end of my story. Are there any questions about that? I think some of this was repetitive for you, but it bears repeating. It’s important to understand the rules and the regulations that govern check. It’s important to understand all the strange things that can happen with duplicates. Try to think like a fraudster when you’re a paying bank, you’ve got multiple checks being presented again and again the same check presented again and again. How did the fraudsters do that? And what do you want to do? And who is going to have holder in due course rights? And so forth and so on, if you’re a depositary bank, you want to make sure that you know what your rights are and what conditions you need to meet in order to make a hold, an RDC indemnity claim. Remember, your customer is not the party that receives that indemnity. It’s the depositary bank that takes that paper check without a restrictive endorsement and suffers a loss because it was returned or adjusted back as duplicate. Not your depositor.
So, if you are an ECCHO member, you can go to our website and look at other education sessions. We have all kinds of other resources out there. If you happen to be an NCP, that earns continuing ed credits. And as always, if you have questions about this session, give me a call. I’ll happy happy to talk to you about it. If you are an ECCHO member, you can get in touch with me about any kind of question that you have.
Did I see a question pop up?
Speaker 2: Nope, just a statement. It says excellent series of webinars. Thank you, Dal and Nikki.
Speaker 1: You are welcome. Thank you very much for your attention. I appreciate that. You have attended these week after week after week, and I hope I hope that all of this knowledge now gives you the power that you need to navigate through all the risks of check. Good luck to you all.
Speaker 2: Yep. Thank you. Have a great afternoon.
ICL – Image Exchange, Adjustment and Return
ICL – Image Exchange, Adjustment and Return
React and so forth. So, you definitely want to keep a copy of that saved to your favorites.
And as I’ve said, neither UCC nor reg CC prescribed how banks exchange checks between themselves or check images, that is always by agreement. When you agree to go through the Fed, you are abiding by Federal Reserve regulation J and their accompanying, operating circular 3, and as such you have the exchange platform available to you and the returns and adjustments, those warranties and indemnities that live in reg CC and UCC of apply to that exchange, as do a couple of warranties that live in reg J. When you are engaging in a private exchange, which is what you’re doing through ACBB, you need a set of rules and that’s where the ECCHO rules come in. So when you send your image cache letter to the, to ACBB as ECCHO members, you are agreeing to use the ECCHO rules. I’m going to stop there a second. Somebody asked me once: why do we need rules for exchange? And the purpose of rules for exchange, whether they go through the Fed or a private exchange, is that everybody has to know when, why, how, and where to exchange the images so timing delivery obligations, and all of that stuff, that’s what reg J and the ECCHO rules cover. So, again, with a private exchange, those reg CC and UCC warranties still apply, but when you exchange through an ECCHO-governed exchange and not through the Fed, the ECCHO warranties, especially rule 9, do apply. So, it’s important to understand that anything that goes through the Fed is not governed by the ECCHO rules, forward or return. So rule 9 only applies to forward cash letters and incoming cash letters and returns that are through an exchange that are governed by the ECCHO rules, doesn’t touch the fit.
So to begin with what rule 9 is, all about are forgeries and counterfeit. And some of you may have heard me talk about a landmark case in 1762 called Price vs. Neal. This was a forgery case that was decided in English court, and you’ll notice 1762 was before the American Revolution. So, at that time U.S. was a colony. So, those laws of England applied to the U.S. and when the U.S. became a country, they adopted a lot of the laws that were already in place. So this Price vs. Neal was an important case that said that the paying bank, the person in the best position to know the maker’s signature, the drawer’s signature, is the party that assumes loss on unauthorized checks. So, in other words, a depositary bank, unless that check is drawn on them, is not going to know whether that drawer’s signature is a forgery or a counterfeit. So consequently, the responsibility for a forgery and a counterfeit is placed on the paying bank because they are the party that can verify the signature and I should say that, whenever we use the word person in rules and regulations, we’re talking about entity, not individuals. So Price vs. Neal and in 1762, the outcome there was the forger was hanged. A little bit extreme and we don’t do that today, but the outcome today is that in the UCC presentment warranties found in articles 3 and 4, it specifically states that the presenting bank, the depositary bank, has no knowledge that the signature of the draft is unauthorized. So, when you are exchanging through the Fed and a you as a paying bank learn of counterfeit or forged check, that is not a breach of warranty on the part of the depositary bank. They tell you, I don’t know this; I don’t know whether this is a forgery or a counterfeit. I have no knowledge. Now, what’s important to remember also is that UCC 4-401 tells the bank when they may charge their customer’s account. It says a bank may charge their account of a customer for a check that is properly payable. And that is defined as authorized by the drawer. Now, the term drawer means the person who writes the check. So, a check that is authorized by the drawer and in accordance with any agreement between the bank and its customer is the check that the bank may charge against its customer’s account. So, what you learn from that is that paying bank may not charge its customer’s account for something that is not properly payable.
So, I’m hearing a little noise in the background. All of you make sure that all of you mute your lines so that we keep it clean here.
So, let’s talk about the returns, the return requirements. In reg CC, a paying bank makes a warranty, when it returns a check, that it did so within the UCC midnight deadline, which says the paying bank may revoke the settlement and recover it, if before it has made its final payment, it returns it before the midnight deadline. Then it says, or within the reg CC expeditious return requirement, which requires the the returning bank, the paying bank to get that return check back to the depositary bank on the second business day following the banking day in which that check was presented. So, let’s just walk through that. This morning, all of you were working your exceptions: your NSFs, your accounts not found, your payments stopped. The point there is, you’re doing that so that you can flag those to be returned, create that return cash letter, and get it out of your shop by midnight tonight so, that those items are back to the depositary bank tomorrow. the second business day following presentment because what you were working this morning is what was presented to you yesterday. So it comes in yesterday has to go out of your shop by midnight tonight. so that it is back to the depositary bank by 2 p.m. their time tomorrow. Notice that, there is no exception. It doesn’t say, unless it is a forged check or unless it is a counterfeit. So that means a paying bank has to discover a forged or counterfeit check the day after presentment so that they can return it and get it back to the depositary bank by the second business day following presentment. So that’s a very important thing to always know and keep in mind, and as I’ve said before the warranties are not made for checks drawn on the Treasury, U.S. Postal Service money order, or a check drawn on a unit of government, which means they’re got drawn on the government not drawn on a bank.
Do remember that you cannot return a check past that deadline for any reason. Again, there’s a lot of misunderstanding. I’ve had banks tell me that, well, I can return a stale date check for a year. No, you have to look at that warranty. And it says, when you return a check, you have to do so timely. However, and that’s the big however, tThere is no rule 9 to the rescue. Rule 9 is an ECCHO rule and it’s for members only. Now, some of you might be wondering what does rule 9 mean. Rule 9 is a leftover from the California Clearing House, where the banks in California, who were participating in a clearing house, agreed that they would exchange, or they would accept returns past the deadline if a check it was a forgery or a counterfeit and then the depositary bank would accept it as a return if they still had the funds. And that got incorporated into the ECCHO rules, which is an electronic exchange. ECCHO rules were written specifically for the image exchange of checks, not the paper exchange of check. So rule 9 is to handle forged and counterfeit checks recognized by the bank customer and notified to the bank after the return deadline. And we know that’s generally what happens. Our customers don’t look at their accounts every single day and say, yesterday you charged me for a check that I didn’t write and they let you know so that you can return it today. That rarely happens unless you have business customers particularly with positive pay and we’ll talk about some some of those products. So what rule 9 does is provides the paying bank an avenue of recourse when it learns of a forged, or counterfeit check past that midnight deadline. It’s available only for check images exchanged among ECCHO members. So, if you are presented a check through the Fed –and you will be – those are not governed by the ECCHO rules or by rule 9. So, when you have incoming cash letters, and you will get two cash letters, one that comes from non-ECCHO members, who send your items that they accepted to the Fed and then thB Fed will present that to you through ACBB or ECCHO members around the country that accepted items drawn on you. They’re going to be sending them to ACBB on your behalf, under the ECCHO rules. And that kind of exchange is governed under the ECCHO rules and rule 9 does apply there. So, you have to have agreed to exchange under the rules, you have to have a receive that image through an ECCHO-governed exchange. Now the ECCHO rules do permit members to opt out of rule 9 and there are, I think, about 14 banks that actually have opted out and we’ll talk about that process in a little bit.
The why of rule 9 is that it shifts the liability for a forgery or a counterfeit back to the depositary bank and ultimately its depositing customer. Rule 9 has the effect of making the depositary bank’s customer responsible for that loss when they deposit a forged or counterfeit check.
Let’s look at the wording of rule 9, and you have access to the ECCHO rules as ECCHO members and you’ll find this in section 19. All the ECCHO rules is in Roman numerals. So if you can tell what year a movie was made, you can read those ECCHO rules. So this is 19-O is where you going to find rule 9 and specifically, it says the sending bank, the depositary bank warrants that the signature of the drawer is not forged or otherwise unauthorized. And the related physical check is not counterfeit, that does a complete 180 on that UCC presentment warranty that we looked at that says, I have no knowledge.
But the ECCHO rules does is varies that warranty which provisions of articled 3 and 4 may be varied by agreement. So, when you agree to exchange, you agree to this variance. That says the depositary bank says, nope, it’s not a forgery. it’s not a counterfeit, and that warranty begins with a depositary bank. And as I’ve said it applies only to ECCHO exchanges, only covers image exchanges. And it only covers member-to-member exchanges, but it will not apply to members who choose to opt out. So, the benefits of rule 9 is it provides the potential avenue of recourse to the paying bank if they learn of a forgery or a counterfeit, past the midnight deadline. And what it does is creates an obligation of the depositary bank to reimburse the paying bank if they still have the funds. And that’s an important point. Rule 9 does not impose a loss on the depositary bank. So what it says is if the paying bank learns of a forgery or a counterfeit past the midnight deadline and they make a rule 9 claim, if the depositary bank still has the funds, then they are going to return those back to the paying bank. There are timing requirements, and we’re going to look at that. But that’s a lot of information. Let’s stop and see if there’s any questions so far.
So far so good.
All right. So look, let’s look at how this warranty flows. I’ll tell you what, this is the most common question I get and lots of misunderstanding about the warranty. So, here’s a visual to help you really break it down. It does not apply to a non-ECCHO member exchange. So, if you got that check from depositary bank is not an ECCHO member, rule 9 is off the table. It does not apply to exchanges through the Fed if that nth item was presented to you through the Fed and you learn that it’s a forgery or counterfeit past that return deadline, you have no recourse. ECCHO rule 9 does not apply, and it doesn’t apply, obviously, to foreign bank deposits nor does it apply to paper exchanges. There are still some banks that do exchange paper. I don’t think there are many anymore, but there were some and, remember that the ECCHO rules is for image exchange. Unless, you know, the two of you were exchanging images agree to include rule 9, and that’s entirely up to you.
All right, so it’s an interbank warranty. It’s a bank-to-bank warranty from depositary bank to paying bank. It doesn’t govern how the banks interact with their customers. So, if you have a customer that deposits any kind of check with you and it comes back for any reason, NSF payment, stopped, or whatever, your customer agreement says, we’re going to charge that back to you. So, you know, the important thing is, is know your customer. You don’t want to be an avenue or a conduit for fraud. Now, it’s important to understand that your customer itself might be the victim of fraud. So, in other words, they’re not deliberately depositing a forged or counterfeit check, but someone may have written them a forged or counterfeit check and they’re going to take the responsibility for it, if a rule 9 claim is made back to that ECCHO member bank or that ECCHO exchange, and the funds are still in the depositary account.
Now, the depositary bank, may choose whether it wants to absorb the loss or charge their customer’s account. There are some banks that will say, okay, my customer has plenty of money, but I’m not going to charge them, but they have to honor their rule 9 warranty. So, they could choose to absorb that loss. They can’t disclaim if it chooses not to charge their depositor’s account but a sufficient funds are available. So that’s an important point. So, you as depositary banks, if you have a particular account that deposited a forged or counterfeit check and a rule 9 claim comes back to you and you have the funds, you can’t disclaim it because you don’t want to charge that customer’s account who happens to be the brother-in-law of the owner of the bank. Can’t do that.
Now there’s what’s called a sufficiency of funds test, and what that means the depositary bank has to verify if there are funds available in that depositary bank or in that depositary account before they just automatically disclaim it. If there are insufficient funds, the depositary bank can disclaim, and then the law stays with the paying bank.
So, the claims process, the rules define them, but they don’t say how you do it. And that’s where you really need to work with ACBB and Angie and her team to understand how do you make a rule 9 claim. And how can you, how do you receive them. So, in ECCHO rule 19 0 12, it says, the paying bank may only bring a warranty claim by delivering the claim directly to the sending bank, that is also the depositary bank. And it says a receiving bank that is not the depositary bank, shall reject any warranty claim that is delivered to it by s paying bank. So, in other words if you sent it to the wrong depositary bank, they’re going to reject it. Say, I’m not the depositary bank. The intermediary bank is not subject to that claim. So the collecting bank, ACCB, be for example, they are not that inter -, they’re not the depositary bank. So when you make that rule 9 claim you have, have to let them know, you’re making a rule 9 breach of warranty claim and when you are sending the image back to them, you’re going to make sure that you say don’t redeposit or represent this item or some similar language.
Now you can send, you can deal direct by sending a claim letter directly through the depositary bank. And we have a sample letter in the rules and also on our website. And I’m going to show you one here in a couple of couple of slides.
Now, the paying bank may make that warranty breach claim by actually returning it if your intermediary, your correspondent agrees to do so. And this is where ACBB provides you with an adjustment platform that will let you use a return Reason code 5, which says this is a rule 9 warranty breach claim and you can make that warranty breach claim by we’ll be returning it through your adjustment process platform that ACBB provides you. You can also attach to that return warranty claim the customer’s written statement, and you definitely want to do that. And I’ll show you why in a second. So, part of the claims process is you have to get a written statement from your customer saying this is a forgery, this is a counterfeit.
Now, you can never send that rule 9 claim through the Fed. I just have to keep emphasizing that because that happens more often than it should. So if you try to make a rule 9 claim through the Fed, that’s going to be a late return unless that thing came through yesterday. But making a rule 9 claim through the Fed by returning a check past the return time frame is a breach of that warranty that we talked about that a paying bank makes that our returns a check timely. So do understand that rule 9 has nothing to do with the Fed, forward, incoming, or return.
So here’s a sample letter and you can get this, here’s the URL. You can find it under the check resources tab on the ECCHO home page. And basically, it says we’re making a rule 9 claim to you and the item was, in fact, a forgery or a counterfeit, so please reimburse us. So this can be a deal direct kind of scenario. And obviously this is a sample letter. So, you want to review with your own legal counsel and make sure that it abides by all your terms and conditions before you actually use the letter.
When, as I said, when you’re making that rule 9 claim include a copy of the customer’s written statement. And why that’s important is that you can dramatically reduce the timing of that claim. And also include the settlement instructions, when you’re dealing direct, send us a cashier’s check.
Now the depositary bank gets this claim. What do they have to do? They have to verify whether or not the depositing account has the, the sufficient funds to cover that client. If they are, they have to honor the claim. Again, I said the depositary bank, the ECCHO rules don’t require the depositary bank to debit their depositor, but it has to honor the claim if there are funds in that account.
Dal, we just had a question come in and it actually is that. So it says it’s the depositor doesn’t have the full amount of the claim remaining in their account. Can the BOFD send only what is left in the account or does it have to disclaim entirely?
Well, the disclaim process, and the reason for disclaim is that are there are not sufficient funds, but that’s an excellent question. Because here’s where you you do want to deal direct. You might, you would contact that paying bank, and say, I don’t have all the funds but I have some of it. Do you want me to return some of that funds, those funds and you can do that by by agreement? So the ECCHO rules say the depositary bank may disclaim if there are not sufficient funds, but the depositary bank and the paying bank can agree to return and accept whatever funds are there. And that’s a the reason that that’s a very good point is that when you as a depositary bank learn that your customer deposited a fraudulent item, unless that customer is the victim themselves, you certainly do not want to be a conduit for that fraud. You want to make sure that your your depositing customer, who is trying to defraud, gains no benefit from it. So thank you for that question. Any others?
Get myself off from you. Yes, there is would you asked for a hold harmless, if the full amount is not satisfied.
Yeah, that would be, that would be appropriate. You know a hold harmless letter is someone sometimes misunderstood the hold harmless reason for a hold harmless letter is when two banks agree to something that the rules and the regulations don’t require them to do. So again, the ECCHO rules say depositary bank, if they don’t have sufficient funds, then they can disclaim it, but they might say, you know what, I’ll send back what I have if you give me a hold harmless letter so that depositary bank can disclaim that warranty if the account is closed, if the funds in the claim amount exceed the funds in the account and again, that’s when you can agree to return what you do have, or if the claim was not made timely as defined in the rules, and we’re going to show you that timing in a second.
The the set of the depositary bank can also disclaim that if they were not, in fact, the depositary bank or if they had opted out, and then of course, there’s legalese other defenses as provided by other applicable law.
So, are there any more questions? I didn’t stop and ask you that, Nikki.
No, that’s okay. All right.
All right, so here’s a copy of the disclaimer form that you can also find in the same way same site and it’s also in the rulebook as well. So, it basically says, and if you look at it, the disclaim reasons would be the account is closed, the claim amount exceeds the funds in the account, the claim was not timely, the paying bank’s customer did not provide a written statement within 60 calendar days, and we’re going to go through this timing on a more clear slide.
So just be aware that there are reasons to disclaim. Timing very important. Your customer, if you are paying bank, has to notify you within 60 calendar days from the statement date that the check is a forgery or a counterfeit.
And that probably coincides with the timing of specified in your account agreement in general that they must let you know of any unauthorized signatures or alterations within 60 days, 60 calendar days. So that’s why the rules try to align with the general Industry standard. So, just know that if your account agreement says greater than 60 days or less than 60 days, under the ECCHO rules, your customer has 60 calendar days to notify you. When they notify you, you have 15 business days to make that claim to the depositary bank. And why I say it’s so important to include the written statement with your initial claim is, if you don’t and the depositary bank wants it, they have 15 business days to ask you for it or just flat-out disclaim it because they don’t have funds. If they do ask you for the written statement, then you have 15 business days to provide it. So, if upfront you provide that written statement, you’re going to knock out 30 business days from that timing.
Okay, any questions about the timing? Take that as a no.
All right. Let’s look at a visual here, the claims process. Here’s the depositing customer. He deposit the check with his bank, Mr. Blue Guy’s bank, the image goes off to the paying bank, customer looks at a statement and starts to sweat because he realizes that he was charged for a forged or counterfeit item.] And so he lets the paying bank know within 60 calendar days of having received that statement. Paying bank then makes that claim directly to the depositary bank or through your adjustment platform. If if the correspondent bank provides you with that, do that.
So what’s important is that the written statement wants to ride with that. If it didn’t, then the depositary bank has 15 business days to ask for it. Paying bank has 15 days to give it back. If you give the depositary bank that written statement, then the depositary bank can charge its customer or absorb the loss themselves. And if there were no funds, they can disclaim. So again, you can cut out a lot of time if when you make the rule 9 claim, you include the customer’s written statement.
Now, opt out; there are banks that choose to opt out. The participation is the default in ECCHO rule. So when you join ECCHO, you are opted in and some sponsoring organizations, like ACBB, may not permit you to opt out and I don’t know whether ACBB does that Anjali? Do you know?
I haven’t had anybody who would ask the opt-out. Okay, all of all kinds and some members as so far. Perfect, okay.
If you choose to] opt out and again, if your agreement with a CB permits you to opt out, then it has to be made by an authorized representative of your institution. You got to communicate that to ECCHO and ECCHO will confirm that in the minimum amount of time that you can stay up that out is six months. You can opt out because you don’t want to get a claim but then tomorrow you want to make a claim in the opt back and doesn’t work that way. And you can go to our this URL and look at the complete process. And you can also see the banks that have opted out.
So, you know when paying bank in high-volume, I mean really just we don’t look at every check that is presented to us anymore after it’s deposited at the depositary bank. It’s not looked at or touched by anyone. In fact, most of the time checks are deposited at the depositary bank, through remote deposit. So, nobody touches that check. So when checks are presented to paying banks, they just charge it against their customer’s account because you don’t look at every check that’s presented. You wouldn’t have time to do that. Some banks do a manual review of higher dollar items. You might choose to look at the drawer signature every item presented over a certain dollar amount. And the point there is you’re trying to minimize your risk of loss. If that’s a fifty-thousand-dollar check, you want to know about it the day after it’s presented so you can return it that same day. Now, you may offer also positive pay products for your high volume, high value customers, which requires them to upload a file every day of all the issue checks, and then all the incoming checks that are being charged against that account are matched against that. And if there are variances, if there’s something that was charged against their account, that they didn’t issue, that’s going to be an exception that they have to tell you about, so you need a strong agreement with that positive pay customer saying, you must look at your account exceptions every single day and let us know timely. And what that does is that protects them from being charged for a counterfeit or forged check and it protects the paying bank from suffering a loss because they’re notified in time to return it.
So there you have it. Knowledge is power. Know the risk, know the rule, know your customer. Do we have any other questions?
Not at the moment.
Wow. Well that was quick. We went through that in relatively short amount of time. I hope that was clear. Definitely use the handout as a resource document for you. And if you have questions on the specifics of how to make that claim through ACBB, that’s what Anjali and company are, are there to help you. If you have questions about rule 9 and you just want to talk it through or go through a specific scenario that you have their are other ways to get a hold of me. Don’t hesitate to do that. As ECCHO members, you have access to our education library. You have access to on call support so you can get a hold of me anytime happy to talk to you not just about rule 9, but any check issue you have, and you certainly want to take advantage of all of the resources that we have on our website. So if there are no other questions, then, thank you all very much for your attention. And we’ll talk to you guys next week.
Fantastic. Thank you guys.
Be safe out there.
ICL – Uniform Commercial Code (UCC)
ICL – Uniform Commercial Code (UCC)
Hey, Dan. Some states, make variances to that. So, with regard to timing, in particular, you want to know what your state’s version of UCC says, what we’re covering today is not varied in any particular way that I’m aware of in state, from state to state. So again, it’s state law and In Uniform Commercial Code there 14 articles, articles three and four are specific to check the first article 3 defines negotiable instruments and is a pretty good read to help you understand a lot of stuff about check and article 4 is also when you should peruse. And that really talks about bank, bank’s obligations to each other and to their customers. Reg CC is a Federal regulation, and in that you will find the definition of electronic check. You will find the Expedited Funds Availability, Availability Act and you will find warranties and indemnities that this Federal regulation imposes on the banks in the exchange of check.
So first neither one of those bodies of law that we just talked about tell banks how they exchange so you have to exchange but you do so by agreement. And there’s essentially two main ways to exchange your images. One is through the Fed, and you agree, if you sign up to exchange your cash letter through the Fed, you agree to do so and Federal Reserve regulation J governs the payment activity of the Fed, including check. And there is an accompanying operating circular three that really gives you specific hows and whys. So as such, you agree to exchange, through the Fed, you agree to user adjustment platform, you agree to return through the Fed and the reg CC and UCC warranties always prevail, and there are in addition, some reg J warranties that essentially tell you when you have to deliver things to the Fed, etc. The second way of exchanging images is through a private exchange, and if you agree to exchange in a private exchange, maybe between two specific banks or maybe a bankers bank, sending him to a home network. You need a rule set and that’s where the ECCHO rules come in. So when you agree to that private exchange and you agree to abide by the terms and conditions of the ECCHO rules, you are agreeing to exchange, agreeing to adjust and return through the platform provided by your provider. Again, reg CC and UCC prevail. And there are a few ECCHO warranties we’ll be talking about, one in particular, called rule 9.
So first, let’s start with a UCC presentment warranties. You find these in article 3 and article 4, article 3 section 4-17 Article 4, 2-008. They are identical in both articles, not going to read through all of these. But you really want to be familiar with this though. The first warranty is essentially where the party that accepts an unaccepted draft, in other words, a check that has not been negotiated, warrants, when it presents that check to the paying banks through a collecting process, that they are entitled to enforce that, and what that means is that they gave the value of that check to the holder, to the payee. The second warranty that is made, is that the check that they’re sending isn’t altered. The third is specific. This warranty applies when you exchange through the Fed, the depositary bank says to the paying bank, I don’t know if the signature on this check is [unintelligble].
So it’s important to understand when you get a check presented to you through the Fed and it’s a forgery or a counterfeit, no warranty is made to use the paying bank that that check is not a forgery or a counterfeit. So that means when a paying bank gets a counterfeit or forged check presented to them through the Fed, they have no recourse unless they catch it and return it timely, and we’ll talk about trying to return requirements as well.
The fourth warranty is superseded by reg CC, but I want to show it to you because if you look at it, you’re going to kind of wonder about it. And this says, with respect to any remotely created consumer item, that it is authorized by the person on whose account the item is drawn and UCC, he specifically talks about consumer items in this warranty, but, reg CC takes that up just a bit. So, reg CC contains warranties and indemnities and here’s the reference. And you definitely want to be familiar with these as a lot of valuable information there too. There are the electronic check warranties. And first of all, reg CC defines the electronic check and I should say that UCC was written for paper and doesn’t really address image exchange. The warranties remain the same, but they don’t really name the image exchange regs. Reg CC does. So it defines what an electronic check is and it, anybody who creates one, images of paper check and sends it to the paying bank warrants that that image, accurately represents the original check. And this is where you’re also going to find what we call the no double debit warranty. The warranty says no one’s going to be asked to pay the same check twice. So that’s your duplicate warranty, even though it doesn’t use the word duplicate.
I mentioned earlier that UCC talks about remotely creating consumer check warranty. Reg CC because it’s a Federal regulation supersedes UCC if there are differences, and reg CC does not differentiate between consumer or non-consumer. So if you are paying bank and a remotely created check post to a customer’s account, regardless of whether it’s a consumer account or a non-consumer account, you have a warranty from the depositary bank that that remotely created check is authorized. You’re also going to find the warranty of settlement and coding and offset. And this is specific to the dollar amount on the check. You make a warranty that you’ve encoded for the proper amount and that you have settled for that amount.
229.34(d)(e) is where the return check warranties live and this is very important to understand. There are specific return timings, when a paying bank returns a check and you have to return the check expeditiously. That means that when you are presented with a check today, tomorrow you have to decide whether to pay it or return it. And if you choose to return it, you have to get it out of your shop by midnight tomorrow. That’s the UCC midnight deadline so that it gets back to the depositary bank the second business day following the date of presentment by 2 p.m. their time. That’s called the expeditious return requirement, and a bank that returns a check makes a warranty to the depositary bank that it returned timely. There’s no provision or allowance for late returns.
And then in 229.34 (f) and (g), that’s where you’re going to find the RDC indemnity and the ECI indemnity. And we’ll touch briefly on that.
So, to start out with the main principle here in UCC 4-401. it tells a bank when they may charge a customer’s account. And that says a bank may charge against the account of a customer item that is properly payable from that account, even though it creates an overdraft, and item is properly payable, if it’s authorized by the customer. Full stop. And is any accordance with the agreement, with any agreement between the customer and the bank, so it’s important to understand that a bank is precluded from charging their customers account for something their customer did not authorize.
Now I’m going to stop here, just a second. I didn’t mention at the beginning that if you have any questions type them in the chat box and I will stop. Nikki’s going to keep an eye on that for me and see if there are any questions. So do, and I’ve been your questions as we go along and Nikki will tell me if there are questions that I need to answer.
So we talked about the warranties. Now what happens with a warranty breach? So what is a warranty breach? That’s where the party that made a warranty did not fulfill its obligation. And what’s critical to understand is that that warranty is not a conditional warranty. It’s not conditional to the warranter’s ability to recover its laws. The party that makes the warranty. The depositary bank has to honor that, even if it turns out that, let’s say, for example, it’s sent an altered check to a paying bank. The paying bank makes a warranty breach claim and the depositor’s account is empty. The depositary bank cannot refuse to honor its warranty simply because it cannot recover from its depositor. And that is a very important point to keep in mind.
Some/most warranty breach claims can’t be handled through any adjustment process, and you have to deal direct. So that’s where the warranted party has to essentially tell the warranter, you breached this warranty. Here’s the evidence. Here’s the statement. Now, pay up.
There are some indemnity claims that can be made through the adjustment platform. For example, the RDC WIC adjustment; WIC stands for warranty indemnity claim. There’s an ECI WIC, the RCC remotely created check, unauthorized remotely created check claim can actually be done through an adjustment and the check 21 warranty, which many of you probably haven’t ever seen unless you were around at the very beginning of check images, after check 21 was passed and that basically said that the image and the substitute check represents the original check and if it doesn’t, there’s a consumer expedited recredit. So, there are submission deadlines that apply with adjustments, and you have to know what they are. If you go through the Fed, each ITYP, which is a Fed adjustment type, gives you the timing that you have to, you have to make the adjustment and get entry which means credit or debit. Outside of that deadline, you might still be able to do the adjustment, but you aren’t going to get credit or debit right away. Or an ECCHO adjustment, you, ECCHO-governed exchange, your adjustment platform is going to tell you the timing. So, you want to be aware of that. In general, the ECCHO adjustment matrix climbing is identical to the Fed, just to make sure that it’s not too confusing.
So, before I go any further, are there any questions that came up?
So far so good.
All right. So now the question is, all right. So there’s a warranty breach or rather, there’s a warranty made, how long does that warranty live? UCC has a three-year statute of limitations. So that first warranty that we talked about, where the depositary bank says to the paying bank, I’m entitled to enforce this check because I gave value to the holder to the payee. For example, I go into my bank and I deposit a check payable to me, my bank puts it in my account, and they make a warranty to the paying bank that they did so. If they put it in Nikki’s account, that’s a warranty breach. So a depositary bank could potentially get a warranty breach claim for an item they presented to a paying bank for up to three years from the presentment date in that check. So that’s pretty important to understand. Now that altered check warranty also lives in UCC, but that is, that timing is varied. There is what’s called a one-year preclusion rule. Sometimes it’s referred to as the statute of repose, which I kind of like that image. And really what that says, is the customer has a duty to examine their statement and report within one year of getting that statement any alterations are unauthorized signatures. Now banks further limit their liability in their account agreement. And typically, they’re going to say to their customer, you have to report any error, any unauthorized signature, any alterations within X number of days of getting the statement. Typically, what I’ve seen is that timing is generally 60 days. And what’s important to understand is that UCC and certain provisions of reg CC may be varied by agreement. So, that’s where the account agreement says, we’re not going to give you a year; we’re going to give you 60 days from the date we make the statement available to you. Now, whatever lives in reg CC has a one-year statute of limitations. So that remotely created check warranty that we talked about that, it lives in reg CC, the encoding warranty. And by the way, the encoding error is one of the few warranties that can be handled through an adjustment as you all know and coding errors used to be the number one adjustment until duplicates came on. And now they have returned to number one.
So those warranties live for one year from the presentment date and it’s important to understand that it’s not from the date of deposit. It’s from the date the check was presented to the paying bank.
All right, let’s look at the players and the exchange of checks and we’re going to use the terms that both reg CC and UCC use. There is the drawer. That’s the person who writes the check. Sometimes we refer to it as maker, which technically isn’t the right term, but we won’t quibble; drawer is not as easy to say as maker. But the legal term is found in both those regulations as drawer. That drawer is going to make that check payable to a payee, who is the holder of that check and that holder can negotiate that check however they want. And this example, they’re making a deposit of paper item into their depositary bank, BOFD, by virtue of their account agreement. They could also deposit that that remotely through remote deposit capture if that’s a service that their bank provides. When that depositary bank receives that check unless it’s drawn on them, they have to get it to the paying bank. And how do they do that? Short of a direct presentment agreement with 10,000 different banks, which is pretty difficult to achieve, that depositary bank is going to use a collecting bed or an intermediary. For example, it could be the Federal Reserve. It could be Atlantic Community Bankers Bank. It could be a correspondent bank. And in today’s environment, that depositary bank is sending the image to through that the image cache letter through that intermediary collecting bank. Then intermediary collecting bank is then going to break down that cash letter and send it to the various end points to the drawee, which is the paying bank, and there are warranties that follow that transfer/ There are UCC transfer warranties, but most importantly, there’s the presentment warranty that’s starts with the depositary bank. And then the reg CC warranties can start with the payee and go all the way to the drawer.
So when that drawee bank gets that check, they charge their customer’s account and done and done. Unless there aren’t any funds in that customer’s account or if that customer put a stop payment on it, or if there is, in fact, no account found, the paying bank will return that check. But as I said, they have to return it timely. There are two clocks that start ticking when a check is presented. There is a UCC midnight deadline, which we talked a little bit about, and then there is the reg CC expeditious return requirement. So let’s walk through this again. If a, when a check is presented to a bank, that bank has until midnight the day following the presenment to either settle, it meaning charge their customers account or return.
So that, and this is where the reg, CC expeditious return requirement picks it up, so that it gets back to the depositary bank by no later than 2 p.m. that depositary bank’s time on the second business day following the banking day in which the check was presented. So again, if it was on scene yesterday was Monday, check was presented to a bank on Monday, Tuesday morning the paying bank is working their exceptions. There are the NSFs, there are stop payments, the there are the account not found, all of those things. The bank has to either charge those against the account or return it by midnight that day. So that so like Tuesday, if it was presented on Monday, get it out of your shop by midnight on Tuesday. So that it is back to the depositary bank by 2 p.m. the next business day. So the second business day following the day that check was presented. And all of those days are business days. Now, an important exclusion to that expeditious return requirement are all government checks. For example, a check drawn on the Treasury of the United States. They don’t have to return a check expeditiously. They can return a check any time they want. Although generally if there’s something wrong with the Treasury check, presented to the U.S. Treasury, they may be doing a reclamation, which the Treasury can do. Another check type of check that is exempt from that return requirement are U.S. Postal Service money orders or any check that is drawn on a on a state or a unit of general local government. What that means is that the check is not drawn on a bank, not payable through a bank, but instead is actually drawn on the government. For example, if you look at a Treasury check, it’s not drawn on any bank. It’s drawn on the Treasury. Same thing with Postal Service money orders. And in the days when we saw state income tax refund checks, they generally were not payable at a bank. They were payable on the state. Those are exempt from an expeditious return requirement.
So let’s take a look.
We did have a question that was presenting.
Yeah, go ahead.
Okay, sorry about that. And it is in regards, and you might be coming up to this, but it says we, the bank, had a fraudulent check situation recently during which some of the fraudulent checks were returned late. Can you please discuss the rights that we, the bank, have with the customer and the bank of first deposit.
We will be talking about that. I’m going to start remembering what we said about UCC 4-401. The bank may charge against its customer’s account a check that is properly payable. That means authorized. So, the first part of your question is, if your customer reports that it’s a forged or counterfeit check, you are precluded from charging them that. What your recourse is we’ll talk about.
Was there another question?
That was it.
Okay. All right. So let’s talk about that entitled to enforce warranty. This is again where the depositary bank makes a warranty to the paying bank that they gave the value of the check to the proper person. And when I say person, that doesn’t mean a flesh-and-blood, that means entity. So again, they gave value to me if I deposited a check payable to me or they give value to a business if that business paid, deposited the check payable to them. So in other words, the depositary bank’s obligation when they accept a check either cash or to pay, er to deposit, they have to give it to the right person.
So, we’re going to look at indorsement now. Now indorsement is sometimes variously misunderstood and I’m going to stop right now. You see, I’m spelling it with an I and you’re probably more commonly used to seeing it with an E. Indorsement is spelled with an I in all of the regulations. So that’s how we’re spelling it. What an indorsement means is the signature other than that of the signer as maker, drawer, or acceptor, that alone or accompanied by other this is made on the instrument for the purpose of negotiating it, restricting the payment of the instrument, for example, for deposit only, and it incurs the endorser’s liability on the instrument. What that means is, let’s say, I deposit a check with my bank and that check is returned NSF. The bank is going to charge it back to me because I am the endorser on, I incurred the liability if that instrument was not paid, I have other recourse against the drawer, but that’s really a sec. That’s a, another story.
Now this question comes up a fair amount and I’ve certainly experienced it if you have a name that is not common, you might get a check that is made payable to you, and your name is misspelled. And by golly, you still want to be able to negotiate that. So what what do you do when the payee’s name is misspelled? And UCC 3-204 anticipates in and says, if the instrument is payable to a holder under a name, that is not the name of the holder. Order for example, Yoko Ono. Ohno, that wasn’t her name. That’s not her name. The indorsement may be made by the holder in the name stated on the instrument or in the holder’s name or both, and generally depositary banks want to see them do both. It’s not required because again the depositary bank makes a warranty, gave the right person the value of the check. So, if there is, if there is a misspelling, then obviously, the depositary bank’s obligations to ensure that that’s all it is. And to give them, give the payee, the appropriate, the appropriate payee the value of the funds.
Now, there are a couple of other types of endorsements that sometimes give depositary banks heartburn and UCC 3-205 talks about them. The first one is a favorite of most banks. It’s called a special indorsement. That’s an indorsement made by the holder, whether payable to and identify person or the bearer, and the indorsement specifies, identifies a person to whom they’re making the instrument payable. That’s a special endorsement. For example, a check is payable to me, but I happen to own Nikki some money. So I’m going to endorse it as drawn. Payable to Dal Bolt, I’m going to endorse it as Dal Bolt. And then I’m going to write under it, pay to the order of Nikki and Nikki’s last name is escaping me right now. So when I do that now, thank you, Nikki, Clarke. When I make that payable to Nikki Clarke, I endorse that check, pay to the order of Nikki Clarke. Now Nikki is the holder and she is the person to whom a I did negotiate that check. So there’s nothing wrong with a special indorsement. The challenge to the depositary bank is if Nikki is standing in front of the teller with that check, they see her endorsement and they can identify Nikki, but they can identify me and they don’t know if maybe Nikki forged my indorsement. So again, you got to know your customer, but it’s there’s nothing particularly suspicious or unusual about a special endorsement; those kinds of things happen all the time. But again, remember that the depositary bank warrants that they gave the right person the value of the check. The second type of indorsement that is discussed is called a blank indorsement and that doesn’t mean no indorsement, and simply means if the check is payable to me, for example, I endorse it, Dal Bolt. That’s a blank endorsement. I’m not putting any additional payee; I’m not putting any kind of restriction on it. I’m simply indorsing it as drawn. And that’s an important thing that we want to teach all of our customers to indorse the check as drawn to avoid confusion. Because again, remember that the depositary bank makes a warranty that it gave the right person the value of that check, but when the drawer, or possibly the drawee, the paying bank looks that indorsement and some do for a large dollar items, if it’s not endorsed as drawn it maybe looks to them like in fact, it’s a warranty breach on the part of the depositary bank, if for example, it is an anomalous indorsement. Anomalous indorsement means an indorsement made by a person who isn’t the holder of the instrument.
For example, a check payable to ABC company is endorsed by Bob Smith, CEO. That happens fairly regularly as you probably all know. That doesn’t mean that the depositary bank breached its warranty, and there was and still kind of remains a practice of paying banks and looking at indorsements over a certain dollar amount to try to do an end run around a potential warranty breach claim on the part of the payee that they never got it. So they see this anomalous indorsement and they think that’s a warranty breach. It is not if the payee actually got credit. So again check payable to ABC company goes into ABC company’s account, but it’s endorsed by the CEO. Why the CEO feels he has to endorse that is a different story. That’s why I say it’s always best to encourage your customers and your members to endorse as drawn.
The other I-endorsement type that’s discussed in UCC 3-206 is called a restrictive indorsement and we talked a little bit about that already. That means we restrict the negotiation to a particular method. So a check payable to me and I want it to go into my account at a bank, I might choose to endorse it Dal Bolt for deposit only. And that can protect me if I lose the check and someone tries to negotiate it. If they actually do, first of all, the bank that accepted it over that restrictive endorsement and did not give it for deposit to me has breached its warranty. One of the most recent applications of restrictive indorsement we know as part of the RDC indemnity that a depositary bank may require its RDC depositors to endorse the check as for mobile deposit only to ABC bank.
Now, what happens when you have multiple payees. And this is a common risk and UCC 3-110 addresses that. If the instrument is payable to two or more persons, alternatively, it’s payable to any of them and may be negotiated by any of them. So our for example is payable to John comma, Paul comma, George, or Ringo. That means it’s payable to them alternatively. Any one of those four guys can negotiate that item. If it’s payable two or more persons not alternatively, it is payable to all of them and can only be negotiated and discharged and enforced by all of them. For example, payable to John comma, Paul comma, George, and Ringo. So now we know that it’s payable to all four of those fellows, and it has to go into an account that all four of those have access to. So if you bank The Beatles, you got to make sure that check goes into the Beatles’ account. If it’s ambiguous as to whether it’s payable to them alternatively, then it’s going to be presumed to be payable alternatively. For example, payable to count John comma, Paul comma, George comma, Ringo. All right. So you see that there is no word and there’s no symbol and they’re so UCC says if it’s ambiguous, it’s payable to the persons alternatively, which again means that any one of them can negotiate that instrument. I’m going to stop there. Any questions so far.
Take that as a no.
All right. So now let’s look at the next warranty that the depositary bank presenting bank makes to the paying bank that the check has not been altered. So, what’s an alteration? UCC 3-407 says it’s an unauthorized change in a check that purports to modify in any respect the obligation of a party. It could be the unauthorized addition of words or numbers or other change to an incomplete check, that’s relating to the obligation of a party. For example, I write a check to Nikki Clarke, but I don’t fill in the legal amount.
And maybe it’s a $10 check somebody intercepted or Nikki decides she wants more than 10 bucks for me. So she adds a few zeros in the courtesy amount and because I left the legal amount empty, she writes a thousand dollars and that’s an alteration. Remember that a check has to start its life in paper. So it’s a change to that paper instrument. That’s an alteration.
All right. This next one is important and kind of addresses the question that came up earlier. When you go through the Fed, this warranty is made by the depositary bank to the paying bank: we don’t know if the drawer signature is authorized or not. Because when you consider it as a depositary bank, when you accept a check that is not drawn on you, do you know if it’s a counterfeit or a forgery? Do you know the drawer’s signature? And unless that drawer also banks with you and has it an account with you, you don’t have any way of knowing that. So you say that to the paying bank, I’m not making you a warranty that it’s unauthorized. So if it is unauthorized, that’s going to be the paying bank’s loss. If they don’t catch it and return it timely because you can’t recover from me, the depositary bank. And every paying bank who wants to try to recover from a depositary bank has to ask themselves when they accept it a check that is not drawn on them, do you make a warranty to the paying bank that it’s authorized? How would you know? And UCC understands that and this actually, this principle is actually based on a tech law that case that was decided in 1620-something called Price vs. Neal. If there’s any NCPs in the group. That basically said, the party in the best position to know the drawer signature is going to assume the loss. If it’s not authorized, the party in the best position to know the drawer’s signature is the paying bank.
And then again, we looked at that remotely created consumer item warranty.
So I just talked to myself ahead. And here’s that payer, landmark case. I was talking about price versus meal and that like I said, was back in 1762, and it says, the paying bank is in the best position to know the maker signature.
So in that scenario when you got that counterfeit check or forged check through a Fed presentment and your customer didn’t look at their statement every day, and we know they don’t, do you have any recourse? First of all, remember what I said about UCC 4-401 when your customer says a forged or counterfeit check paid against my account last week, you don’t have any defense for not reimbursing the account holder because UCC says, here’s when you may charge your customer’s account, and it’s important to remember that the laws and regulations tell you what you must do. They don’t tell you what you mustn’t do. They’re not like the Ten Commandments, thou shalt not, instead they say thou shalt. So you are the depositor or the paying bank and you learn of a forged check and it’s too late to return. Is there any way you can recover? Absolutely. You can make the attempt by contacting the depositary bank. You can always talk to each other. Tell the depositary bank, you sent me a forged or counterfeit check. That depositary bank wants to know if it has a fraudster for a customer or if it has a customer who was the victim of fraud. It’s possible that that depositary bank has the funds still on deposit. If they do, they may very well agree to return them to you provided you give them something like a hold harmless letter for example. Understanding that, that BOFD tomorrow maybe a paying bank who paid a counterfeit check too late to return and now wants to talk to you, the depositary bank. So check collection is a cooperative exercise. Besides so, you know, what goes around comes around.
Now I keep on saying if you got that check through the Fed, if you got this check through a private exchange governed by the ECCHO rules, there is a warranty that is unique to the ECCHO rules and that’s called rule 9. And it’s only applies to ECCHO members when a check is exchanged between an ECCHO depositary bank and an ECCHO paying bank through a private exchange, not through the Fed. And the purpose of rule 9 is to be able to give that paying bank some potential recourse when it learns of a forgery or counterfeit past the 24-hour return time frame. So again, I can’t emphasize this enough, it’s only for check images between exchange, between check between ECCHO members through a private exchange. You did not get that through the Fed; paying bank was not presented that check through the Fed. The depositary bank did not send it to the Fed. So those two parties have agreed to exchange under the ECCHO rules and the ECCHO rules actually provide a member the opportunity to opt out of room, which means they can’t make rule 9 claims and they aren’t subject to getting them. There’s about 14 banks in the U.S. that have opted out. You can find that list on our website. What this does is shift the liability for a forgery or counterfeit back to the depositary bank. Because it says the rule specifically says the depositary bank is obliged to reimburse the paying bank if they still have the funds, which means that this shifts a liability ultimately back to the depositary bank. Here’s the language that you’ll find in 19-O in the ECCHO rules, the sending bank warrants that the signature is not forged or otherwise unauthorized and the related physical check is not counterfeit.
The depositary bank is liable to the paying bank if the claim is made timely, and if the funds are on deposit. It’s important to understand that rule 9 will not impose a loss on the depositary bank. So, the w-, the warranty begins with the depositary bank and it only applies to ECCHO exchanges.
Any questions about that? Right.
So, what are the benefits? It’s an avenue of recourse and I sometimes call it a Hail Mary pass because we have if a depositor and has an actual live fraudster and they’ve and they created a counterfeit check, they’re going to grab those funds the second the depositary bank makes it available. But very often, the depositor, like a business, is the victim which means that in the case of a rule 9 claim, the depositary bank can recover from the depositor.
So again, there are timing requirements to make that claim and the depositary bank is obliged to reimburse the paying bank, if they still have the funds.
So, you have to know how your images are exchanged. When you get an item that your customer says, this is a forgery, first thing you want to determine is, did I get it from the Fed? If I did, rule 9 doesn’t apply. End of story. If I got it through an ECCHO exchange, then rule 9 does apply. So you want to make sure that the depositary bank hasn’t opted out. You want to make sure you make that claim timely and you may possibly recover. So know how your images are exchanged.
All right. The last one we’re going to talk about is remotely created checks.
So, there was a question that just popped up. Let’s address that a second. Nikki, you can you read that?
I can, it said, I understand that a bank cannot make a breach of warranty claim against a BOFD for a fraudulent maker signature. But what about a forged payee’s endorsement not discovered under after the return deadline? Is that covered under UCC’s presentment warranties?
Right. So if I wrote a check to Nikki and somebody intercepted it and forged Nikki’s signature on the – and remember what I said and we’re looking at it right now. The first warranty is that the depositary bank warns that they are entitled to enforce that. So if they took that check with Nikki’s forged endorsement and gave value to the impersonator, they breached their warranty and that is a warranty breach that is recoverable by the paying bank.
Excuse me. All right, so I talked about this presentment warranty, about RCCs. Here’s the reg CC warranty. It says a bank that transfers or presents a remotely created check and receives a settlement makes a warranty that the person on whose account the remotely created check is drawn authorized it in the amount of the check and to the payee stated.
All right. What’s a remotely created check? Reg CC defines it as a check that is not created by the paying bank and does not bear the signature of the person on whose account the check is drawn. Looks something like this. Instead of the signature of the drawer, it’s going to say something like this check has been authorized or verbally authorized you by your depositor or signature on file. All those kinds of terminology.
The payee creates this check, and it’s going to have the drawer’s name, just like as though the drawer wrote it, in other words, the person on whose account the check is drawn. But it doesn’t bear their signature. So that’s a remotely created check. And when you are notified that a customer says a forged or counterfeit check posted to my account and you bring up the image and you see it looks something like this. You can sigh, have a big sigh of relief. I remember the days when I would do that and oh this one, I can recover. Now, I’m pointing out a field immediately to the left of the routing and transit number symbol that’s called the external processing code field, EPC field. This is not a mandatory field for a check, a forward moving check. But there’s an optional value 6 that you can put in that and that denotes a remotely created check. The purpose of that is if you are a depositary bank and you have a customer who is creating remotely created checks, you want to know that, that because you are making the warranty and if you can’t recover from your depositor it’s your loss.
FTC is very, very leery of remotely creative checks and actually prohibits the use of them for telemarketers.
So if you have a customer, a business customer that is legitimately creating these because there is a service there, there is value to it, you may want to tell them that they have to populate that EPC field with a 6, so that you can programmatically track their deposit of those and as a paying bank, you could edit on that field to determine whether you are being presented with RCCs, remembering that if it’s unauthorized, it’s a warranty breach. And that is one of the few warranty breaches that has an adjustment avenue available to it. So, if you learn about it, within the return time frame, return it. If you learn about it after, which is when we mostly learn about unauthorized checks, you have recourse. If you got it through the Fed, you do a URCC WIC adjustment, that stands for unauthorized remotely created check warranty indemnity claim. And actually you have 150 days from the cash letter date. I missed that. I didn’t fix it on this slide. Or a Fed exchange, the Fed extended that from 90 days to 150 during the pandemic and hasn’t changed that yet because the pandemic isn’t over, because you have to get an affidavit from your customer that that RCC is that unauthorized. The Fed says, it has to be a sworn statement and because of the pandemic conditions, it may take you a little longer to get that affidavit in your hands in order to do that adjustment, consequently they have 90 days. For an ECCHO exchange, it has stayed at 90 days. After that, you may do the adjustment, but you won’t get entry. Or you have to deal direct up to one year from the cash letter date of the paid check. Because remember, the reg CC has a one-year statute of limitations. So, before I get into the RDC indemnity, are there any questions about this?
All right. So let’s talk about the RDC indemnity. This has been a new, probably, the latest indemnity and has been the result of what we have seen, the total explosion of duplicates when we gave remote deposits, capture services to consumers. Purpose of the indemnity is to protect a depositary bank that accepts that paper check from a loss if that check has returned or adjusted back to them as having already been paid. It’s to encourage those RDC depositary banks to ensure that they have good deposit practices. Do not give RDC to just anybody because they have a pulse. RDC represents a risk to the RDC depositary bank. So you want to make sure that you vet your customer, that you have controls and standards there. It addresses is the risk that the customer retains the original check. And we’re being generous here. They may intentionally or mistakenly deposit that paper check at another bank. The RDC bank’s potential liability arises because it permits the customer to keep the paper check.
Right? So here’s what the indemnity says. It’s provided by depositary bank. It’s a truncating bank. Not because it actually took the paper but because it accepted an image of that paper. It did not receive the original check for deposit, and it received settlement for it, and it didn’t get it back returned on paid. Under those conditions that RDC depositary bank makes an indemnity to a depositary bank that accepts the original paper check for losses it incurs if that depositary bank gets a chargeback or adjustment due to it having already been paid. So in other words, your customer deposits the check with you through remote deposit and then takes a check either to a check casher, I’m sorry, not to check casher to another bank. Maybe has an account at another bank and it’s surprising how many people have multiple accounts. And that bank takes the paper check, the paper check has returned or adjusted back to them as having already been paid, and, surprise, surprise! Their customer’s account is empty. Now that paper depositary bank’s suffered a loss. They can make an indemnity claim back to the RDC depositary bank. Now if that paper check bore a restrictive endorsement that said, for mobile deposit only, and that paper bank accepted it, then they are precluded from making the indemnity claim because they accepted and negotiated that check in term over the terms of the restrictive endorsement.
And Dal, just before you get into this next slide. Just keeping track of time. Here. We have about eight more minutes. So if you have questions send them over and I’ll let you wrap up for the next couple minutes. And just a reminder that this will be taking place over the next couple of weeks and the link that you have that was sent to you will be working for this moving forward.
Great. So, the indemnity, indemnity to the paper depositary bank, is that the depositary bank must receive the paper. And that indemnified depositary bank does not have to present the original check for paper for payment. In other words, the depositary bank takes the paper check, but they’re going to send the image to the paying bank.
But if that paper check had a restrictive endorsement, the indemnity is off it. Is it negates that indemnity. And it doesn’t indemnify other banks than the collection process, we talked about those in those intermediary banks. They are not part of this. And it doesn’t apply to other kinds of problems. Like, for example, alteration, forged endorsements, and those kinds of things. Those are separate warranties, that would be dealt with separately.
Now, when you are that paper bank, that took that check without the restrictive endorsement, and you suffer a loss, how do you determine who that RDC depositary bank is? If you got it through a Fed exchange, there’s an ITYP called INFO and the Fed will do some research and provide you with the depositary bank of that item. You have to do it within one year of getting that item presented to you as the paying bank. If you got it through an ECCHO-governed exchange, then you’re going to submit a source of item identification form to the paying bank. So when you’re the depositary bank of that paper check, this is how you’re going to find out who the RDC depositary bank, either for a Fed exchange, an INFO ITYP or source of item identification through an ECCHO exchange. Both of them must be done within one year of the presentment date of that check.
So, here’s an example of the claim. Mr. Blue Guy. He’s got, he’s got the paper check, and he deposits it through remote deposit to RDC depositary bank. Image hits the paying bank. Everybody’s happy, except he takes that paper check and that paper check is a blank endorsement. Remember that blank endorsement means Mr. Blue Guy just endorsed it. He didn’t put any special instructions. No restrictive endorsements. So that paper depositary bank accepted it in good faith, and they sent that item to the paying bank, who shoots it back to them. It’s a duplicate. So they try to charge it back to Mr. Blue Guy’s account and surprise, surprise! His account is empty. That’s when the indemnity is provided to that paper depositary bank by the RDC depositary bank. And the paper depositary bank can make a claim.
So, let’s walk through this same scenario, except where Mr. Blue Guy deposits that paper check and it does bear a restrictive endorsement, for mobile deposit only to RDC depositary bank. Paper depositary bank accepted it. Paying bank says duplicate. Paper depositary bank tries to recover from Mr. Blue Guy, and they can’t. Is there an indemnity provided to that paper depositary bank? There is not. Now what’s important is if you are a paper depositary bank and you accepted a paper check and you’re going to make that RDC indemnity claim, you need to provide a copy of the check, front and back as you accepted it, to the RDC depositary bank. And if you aren’t an RDC depositary bank, you’re going to get and you get an RDC indemnity claim, if that paper depositary bank doesn’t give you a copy of the check front and back, ask them to do so. Because if it bears a restrictive endorsement, you can disclaim it that way.
We just had a question come in and it’s a, does it matter which occurs first the paper or the RDC deposit?
It doesn’t matter, doesn’t matter. Because here’s the thing about, remember we talked about that reg CC no double debit warranty. A presenting bank and deposit in a bank that presents a check to a paying bank warrants that no one’s going to be asked to pay the same check twice. So in this example, RDC depositary bank made that warranty, paper depositary bank made that warranty, paying bank would probably have gotten this debit back to the right place if they had returned or adjusted that item back to RDC depositary bank. Because if there was going to be a loss, it’s the RDC depositary bank, who should suffer that loss. So this brings up and this is aa subject for another day, but this brings up when you are a paying bank and you detect duplicates, our old process used to be, well, let’s just automatically return the second one because we’re still within the return time frame, that may not be the right thing to do. Some research is is really necessary because let’s say that that that second one was actually accepted by a check casher, for example, who if he met all the requirements, are, has holder in due course rights and can enforce that check back against the drawer.
So if the paying bank can determine through the process of elimination when it’s got duplicates, those one of those duplicates bear the endorsement of a check casher. If it does, don’t adjust or return that one, instead adjust the one you got, the other one you got, and when you think about the timing here, when Mr. Blue Guy did this RDC deposit and then he went and took that paper check to another bank, what’s the likelihood of the RDC depositary bank’s image to hit the paying bank first? Generally it’s going to be there first because let’s say he doesn’t actually go to a paper depositary bank, but he cashes it at a check casher. That check is going to represented to the paying bank probably at least a day later than the RDC depositary bank’s image. So just something to consider. There’s no science to it. You really just have to examine the endorsements and see if you can determine if one of those endorsements may potentially have holder in due course rights. For example, a check casher, a liquor store, a grocery store, any place that cashes check that is isn’t a bank.
Any other questions?
Nothing. Okay. We got this. We got this done within the time frame. I appreciate it. Thanks for sitting through this. Here’s all the ways to get in touch with me if you have questions about this particular session.
And if there are no further questions, we’ll let you go. All right. Thank you very much, and we look forward to seeing you next week. Same time. Same place.
All right. Take care everybody.
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