Chapter 25 Checks and Digital Banking

The Bank – Customer Relationship Creditor – Debtor Relationship Created when a customer deposits money into the bank. The customer is the creditor and the bank is the debtor. Principal – Agent Relationship Created if the: deposit is a check that the bank must collect for the customer or the customer writes a check against his or her account The customer is the principal and the bank is the agent. Copyright © 2004 by Prentice-Hall. All rights reserved.

The Uniform Commercial Code (UCC) Banking Provisions Revised Article 3 (Negotiable Instruments) Article 4 (Bank Deposits and Collections) Article 4A (Funds Transfer) Copyright © 2004 by Prentice-Hall. All rights reserved.

Ordinary Checks Article 4 of the UCC – establishes the rules and principles that regulate bank deposit and collection procedures. Check – an order by the drawer to the drawee bank to pay a specified sum of money from the drawer’s checking account to the named payee (or holder). Copyright © 2004 by Prentice-Hall. All rights reserved.

Parties to a Check Drawer – The customer who maintains the checking account and writes (draws) checks against the account. Drawee – The bank on which the check is drawn. Payee – The party to whom the check is written. Copyright © 2004 by Prentice-Hall. All rights reserved.

Indorsement of a Check Occurs when a payee indorses a check to another party by signing the back of the check. Indorser – The payee who indorses a check to another party. Indorsee – The party to whom a check is indorsed. Copyright © 2004 by Prentice-Hall. All rights reserved.

Special Types of Checks Bank Checks – Checks for which the bank is solely or primarily liable. Certified Check Cashier’s Check Traveler’s Check Copyright © 2004 by Prentice-Hall. All rights reserved.

Electronic Fund Transfer Systems Automated Teller Machines Point-of-Sale Terminals Direct Deposits & Withdrawals Pay-by-Internet Copyright © 2004 by Prentice-Hall. All rights reserved. 3

Bank Debit Cards Electronic Fund Transfer Act and Regulation E – regulate consumer electronic fund transfers and establish consumer rights in the following areas: Unsolicited cards Lost or stolen debit cards Evidence of transaction Bank statements Copyright © 2004 by Prentice-Hall. All rights reserved.

Honoring Checks Payment of a drawer’s properly drawn check by the drawee bank. Stale Checks Incomplete Checks Death or Incompetence of a Drawer Stop-Payment Orders Overdrafts Wrongful Dishonor Copyright © 2004 by Prentice-Hall. All rights reserved.

Federal Currency Reporting Law Federal currency reporting laws require financial institutions and other entities to file a Currency Transaction Report (CTR) with the Internal Revenue Service (IRS) for: The receipt of a single transaction or a series of related transactions of cash in an amount greater than $10,000. Suspected criminal activity by bank customers involving a financial transaction of $1,000 or more in funds. Copyright © 2004 by Prentice-Hall. All rights reserved.

Forged Signature of the Drawer Forged Instrument – A check with a forged drawer’s signature on it. The ultimate loss for the payment of a check over the forged signature of the drawer usually falls on the bank that paid the check. The payor bank may recover from the forger, if he or she can be found. Copyright © 2004 by Prentice-Hall. All rights reserved.

Altered Checks A check that has been altered without authorization that modifies the legal obligation of a party. Original Tenor Presentment Warranty If the payor bank pays the altered check, it can charge the drawer’s account the original tenor (amount) of the check but not the altered amount. Copyright © 2004 by Prentice-Hall. All rights reserved.

The Collection Process A bank is under duty to accept deposits into a customer’s account. This includes collecting checks that are drawn on other banks and made payable or indorsed to the depositor. UCC Article 4 regulates the collection process. Copyright © 2004 by Prentice-Hall. All rights reserved.

The Collection Process (continued) Payor Bank – The bank where the drawer has a checking account and on which the check is drawn. Depository Bank – The bank where the payee or holder has an account. Collecting Bank – The depository bank and other banks in the collection process. Intermediary Bank – A bank in the collection process that is not the depository or payor bank. Copyright © 2004 by Prentice-Hall. All rights reserved.

The Check Collection Process Drawer issues a check to Payee drawn on Country Bank Payee deposits the check in her account at Metro Bank Metro Bank sends the check to City Bank for collection METRO BANK CITY BANK DRAWER PAYEE Drawer has a checking account at Country Bank (Depository and collecting bank) (Intermediary and collecting bank) COUNTRY BANK City Bank sends the check to Country Bank for collection (Drawee and payor bank) Copyright © 2004 by Prentice-Hall. All rights reserved.

The Check Collection Process (continued) The Federal Reserve System Deferred Posting Provisional Credits Final Settlement Copyright © 2004 by Prentice-Hall. All rights reserved. 3

The “Four Legals” That Prevent Payment of a Check Receipt of a notice affecting the account, such as a notice of the customer’s death, adjudgment of incompetence, or bankruptcy. Receipt of service of a court order or other legal processes that “freezes” the customer account (e.g., a writ of garnishment). Copyright © 2004 by Prentice-Hall. All rights reserved.

The “Four Legals” That Prevent Payment of a Check (continued) Receipt of a stop-payment order from the drawer. The payor bank’s exercise of its right of setoff against the customer’s account. If one of these four legals is received before the payor bank has finished its process of posting, the check cannot be paid contrary to the legal notice or action. Copyright © 2004 by Prentice-Hall. All rights reserved.

Failure to Examine Bank Statements in a Timely Manner The customer owes a duty to examine the statements (and canceled checks if received) promptly and with reasonable care to determine if any payment was not authorized because of alteration of a check or a forged signature. The customer must promptly notify the bank of unauthorized payments. Copyright © 2004 by Prentice-Hall. All rights reserved.

Duty of Ordinary Care Collecting banks are required to exercise ordinary care in presenting and sending checks for collection. Failure to do so constitutes negligence. A collecting bank that takes proper action on a check prior to its midnight deadline is deemed to have exercised ordinary care. A bank is liable only for loses caused by its own negligence. Copyright © 2004 by Prentice-Hall. All rights reserved.

Commercial Wire Transfers UCC Article 4A – Fund Transfers governs wholesale wire transfers. Applies only to commercial electronic fund transfers. Consumer fund transfers subject to the Electronic Fund Transfer Act are not subject to Article 4A. Copyright © 2004 by Prentice-Hall. All rights reserved.

Commercial Wire Transfers (continued) UCC Article 4A (continued) Governs the rights and obligations between parties to a fund transfer unless they have entered into a contrary agreement. If a receiving bank mistakenly pays a greater amount to the beneficiary than ordered, the originator is liable for only the amount he or she instructed to be paid. Copyright © 2004 by Prentice-Hall. All rights reserved.