25-1 Chapter 25 Banks, E-Money, and Financial Reform

25-2 The Bank – Customer Relationship  When a customer makes a deposit into a bank, a creditor–debtor relationship is formed  Creditor–debtor relationship: A relationship that is created when a customer deposits money into the bank  The customer is the creditor, and the bank is the debtor Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-3 The Bank – Customer Relationship  A principal–agent relationship is created if:  The deposit is a check that the bank must collect for the customer  The customer writes a check against his or her account  The customer is the principal and the bank is the agent Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-4 UCC Banking Provisions Revised Article 3 (Negotiable Instruments) Article 4 (Bank Deposits and Collections) Article 4A (Funds Transfer) Revised Article 3 (Negotiable Instruments) Article 4 (Bank Deposits and Collections) Article 4A (Funds Transfer) Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-5 Parties to a Check  Drawer : Customer who maintains the checking account and writes checks against it  Drawee : Bank on which check is drawn  Payee : Party to whom check is written Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-6 Exhibit 25.1 – Ordinary Check Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-7 Indorsement of Check  Payee is holder of a check  Payee has the right to:  Demand payment of the check  Indorse the check to another party by signing the back of the check  Indorsement of a check: A payee’s signing the back of a check in order to turn it over to another party  The payee is the indorser  The person to whom the check is indorsed is the indorsee Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-8 Special types of Checks  Bank check: A certified check or a cashier’s check, the payment for which a bank is solely or primarily liable Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-9 Bank Checks  Certified check  Bank agrees to accept check when presented for payment  Pays out of funds set aside from customer’s account  Cashier’s check  Two-party check  Bank is both drawer and drawee  Holder is payee Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-10 Exhibit Certified Check Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-11 Exhibit Cashier’s Check Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-12 Honoring Checks  Customer agrees to keep sufficient funds in account to cover any checks written  If funds are adequate, bank is under a duty to honor check Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-13 Honoring Checks  Stale checks  Check outstanding for more than six months  Bank has no obligation to honor  Incomplete checks  Drawers sometimes write checks that omit certain information  The UCC places the risk of loss of an incomplete item on the drawer Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-14 Honoring Checks  Postdated check  A check that a drawer does not want cashed until sometime in the future  Stop-payment orders  An order by a drawer of a check to the payer bank not to pay or certify a check  A stop-payment order can be given orally or in writing Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-15 Honoring Checks  Overdrafts  The amount of money a drawer owes a bank after it has paid a check despite the drawer’s account having insufficient funds  Wrongful dishonor  A situation in which there are sufficient funds in a drawer’s account to pay a properly payable check, but the bank does not do so Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-16 Federal Currency Reporting Law  Requires financial institutions and other entities to file Currency Transaction Report with IRS reporting:  Cash transactions in amounts greater than $10,000  Suspected criminal activity by bank customers involving financial transactions of $1,000 or more Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-17 Forged Signatures  Major problems associated with checks:  Signatures are sometimes forged  A check itself may have been altered prior to presentment for payment Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-18 Forged Signature of the Drawer  Forged instrument: A check with a forged drawer’s signature on it  The payer bank cannot charge the customer’s account if it pays a check over the forged signature Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-19 Altered Checks  A check that has been altered without authorization and modifies the legal obligation of a party  If paid, bank can:  Charge drawer’s account for original tenor  Recover difference between altered amount and original tenor from party who presented check Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-20 One-Year Rule  If a drawer fails to report a forged or altered check to the bank within one year of receiving the bank statement and canceled checks containing it, the bank is relieved of any liability for paying the instrument Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-21 Series of Forgeries  If the same wrongdoer engages in a series of forgeries or alterations on the same account:  The customer must report that to the payer bank within a reasonable period of time Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-22 Exhibit Check Collection Process Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-23 The Collection Process  The collection process, involving several banks, is governed by Article 4 of the UCC  Payer bank: The bank where the drawer has a checking account and on which a 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 bank or the payer bank Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-24 Deferred Posting  Deferred posting rule: A rule that allows banks to fix an afternoon hour of 2:00 p.m. or later as a cutoff hour for the purpose of processing items  The deferred posting rule applies to all banks in the collection process Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-25 Provisional Credits  A situation in which a collecting bank gives credit to a check in the collection process prior to its final settlement  Provisional credits may be reversed if the check does not clear Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-26 Final Settlement  A check is finally paid when the payer bank:  Pays the check in cash  Settles for the check without having a right to revoke the settlement  Fails to dishonor the check within certain statutory time periods Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-27 Final Settlement  “On us” item: A check that is presented for payment where the depository bank is also the payer bank  The drawer and payee or holder have accounts at the same bank  “On them” item: A check presented for payment by a payee or holder where the depository bank and the payer bank are not the same bank Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-28 Failure to Examine Bank Statements in a Timely Manner  Customer must examine monthly statements of checking accounts in timely fashion and with reasonable care  Determine whether checks may have been altered or forged  Promptly notify bank of unauthorized payments  Customer liable if bank suffers a loss due to customer’s failure to perform this duty Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-29 FDIC Insurance of Bank Deposits  Government agency that insures deposits at most bank and savings institutions  Backed by full faith and credit of U.S.  Limits of $250,000 per single account  Covers savings, checking, money markets, CDs, IRAs  Does not cover stocks, bonds, mutual funds, life insurance, annuities Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-30 E-Banking and E-Money  Electronic Funds Transfer System  ATM  Point-of-sale terminal  Direct deposit and withdrawal  Online banking  Debit cards Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-31 Consumer Electronic Funds Transfers  Electronic Funds Transfer Act: A federal statute that regulates consumer electronic funds transfers  The Electronic Funds Transfer Act and Regulation E establish the following consumer rights:  Unsolicited cards  Lost or stolen debit cards  Evidence of transaction  Bank statements Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-32 Electronic Wire Transfers  Commercial wire transfer (wholesale wire transfer): An electronic transfer of funds from one party to another party  Two principal wire payment systems  The Federal Reserve Wire Network (Fedwire)  The Clearing House Interbank Payments System (CHIPS) Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-33 Electronic Wire Transfers  Benefits of using wire transfers  Speed  Low cost Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-34 Dodd-Frank Wall Street Reform and Consumer Protection Act  A federal statute that:  Reorganizes federal government supervision of the banking system  Regulates previous unregulated financial products and institutions  Adds a new consumer protection agency to protect consumers from abusive lending and banking practices Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

25-35 Landmark Law - Bank Reform Mandated by the Dodd- Frank Wall Street Reform and Consumer Protection Act  The most important provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act are:  Bank regulation  Lending regulation  Bureau of Consumer Financial Protection Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

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