ICL – Uniform Commercial Code (UCC)
August 28, 2021
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.