Basics of Negotiable Instruments

7/30/2019 Basics of Negotiable Instruments

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Copyright 2006 by Pivotal Financial Resources

VerisureInc.

Basics of NegotiableInstruments

Webinar from Verisure, Inc.

Moderator: Gregg Bennett

T402 Teller Training Series


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Topics to Cover

Background of the Legal andRegulatory aspects

UCC (Art icles 3, 4 & 4A)

Regulatory Agencies

Contracts & disclosures

Commercial Paper

Checks & Endorsements

Deposits, Collections and thecollecting bank and depositorduties

Electronic Services

Deposit agreements

Policies, procedures &risk/fraud prevention


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Generalcontentsof the UCC-Articles 3,4 & 4A areof specificconcernsfor bank

operations

Bulk Transfers and SalesAr ticle 6

Warehouse Receipts & other docsAr ticle 7

Secured TransactionsAr ticle 9

Investment SecuritiesAr ticle 8

Letters of CreditAr ticle 5

Funds TransfersAr ticle 4A

Bank Deposits and CollectionsAr ticle 4

Negotiable InstrumentsAr ticle 3

LeasesAr ticle 2A

SalesAr ticle 2

General ProvisionsAr ticle 1

The UNIFORM COMMERCIAL CODE


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Regulatory Framework Dual Banking (State, and

Federal charters)

Federal Reserve Bank

Federal Insurance (FDIC)

Charter Grantor &Supervisor State Banking Depts

OCC (National Banks)

OTS (Thrifts)

NCUA (Credit Unions)

FFIEC & NACHA Rules(Regulatory and industry

standards organizations) Laws versus Regulations


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Legal Authority & Rules

United States Code, Title 12 (Banks and

Banking): The USC is a consolidation andcodification by subject matter of thegeneral and permanent laws of the UnitedStates. (Title 12 is speci fic to banking)

Code of Federal Regulations The CFRcontains regulations issued by executivebranch and agencies of the Federal govt.

State Banking Laws: Each state has a setof laws or banking code that applies inthe state. Especially for State Charteredbanks & CUs, but can apply to o thers.

Clearinghouse & Other organizations:Membership in an organization may have

other rules that must be followed, such asNACHA, PULSE, VISA & M/C.


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Regulator Duties

OTS*Thrifts & SavingsBanks

NCUA*Credit Union

State

FDIC*

State non-member,insured bank

State

FRB*

FDIC

State Member Bank

With FDIC

OCC*

FRB

FDIC

National Bank

RegulatorsType of FI

* Primary Federal Regulator

Purpose of Examinations

True financial condition

Al l laws/regs observed

Capital sufficiency

Suggest improvements


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Contracts & DisclosuresCu s t om e r S i g n s B a n k Pr o v i d e s

Deposit Agreement

General terms and policies Ownership & beneficiary rules

Liability

Withdrawal and deposit l imits orrestrictions

Set-off and OD rules

Statement review and time limitsfor claims

Stops, stale or post dated items,charge-backs, restrictive legends,

ACH, wires, dormant..

Reg DD - Truth-in-Savings

Reg CC Deposit Availability

Reg E EFT Disclosures

Reg P Privacy Policy

Signature Cards Name and address

Account informationand number

Other demographics

Who has signaturepower and limits

Ownership structure

TIN Certification andBack-up Withholding

Survivorship andbeneficiary instructions

OD protection, ATM,

Debit, IVR,Internet andother special serviceagreements


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Commercial Paper Overview UCC, Article 3 (adopted in 1953)

Appl ies to drafts, checks (a typeof draft) and promissory notes

Based on N.I.L.

Excludes investment securities,documents of title and money

Standardized rules for thenegotiation and liabilities ofparties involved in transfer

Negotiation Means transfer ofan instrument from one party toanother so the latter becomes

the holder-in-due coursethrough voluntary delivery.


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Negotiability Requirements

6. Sum certain ($ andamount)

7. Specified account

8. Dated or demand (notstale or post for cks)

1. Be written

2. Signed by the maker

3. Words of negotiability

4. Drawee (bank for cks)

5. Payee (or bearer)


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Endorsements or Indorsements The fundamental purpose is to

transfer rights & ti tle of an

instrument so it can be collected bythe next party accepting the item.

Types of Endorsements Blank

Special

Restrictive

Qualified*** (be careful)

Warranties of the Endorser Has good title

Everything genuine and authorized

No alterations exist

No defense against item

No knowledge of p roblems relatedto funding of item


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Holder-In-Due-Course Status The major purpose of this special status is to extend

collection rights protection to any party againstadverse circumstances over which they have nocontrol , as long as they acted in good faith whenhandling an item. (Can over-ride Personal defensechallenges, but not Absolute/Real defenses)

Qualification Requirements Received item FOR VALUE

Received item IN GOOD FAITH

Received item under p roper condit ions of NEGOTIATIONand DELIVERY

Received item without notice that is is overdue or has beendishonored

Received item without notice of any claim against theinstrument of defense against it.


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Defenses Reasons for Nonpayment Absolute or Real:

Available againstall types of parties

Types/Examples Essential Fraud

Lack of Title

Bankruptcy

Forgery

Incapacity

Illegality (mixed)

Al teration (mixed)

Personal Defenses:

Not available againstHolders-in-duecourse

Types/Examples Simple Fraud

Lack of delivery

Lack of consideration

Undue influence

Discharge beforematurity

Claims or equities ofownership


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Deposits & CollectionsCollecting Bank Obligations Depositor Obligations Collecting bank must

exercise ordinarycare in promptly Presenting the check or

item to the payor forpayment; or

Sending the check oritem to another qualifiedcollecting bank for itsultimate presentment tothe payor

If dishonored by thepayor notif ication to

the bank, person or FRBof the dishonor in atimely manner

Endorse/transfer title tocollecting bank

Assume primary l iabil ityfor the check or itemdeposited or cashed

Assume al l warrant iesof an endorser and allowthe collecting bank tobecome a holder-in-due-course

Make the collecting

bank whole in the eventof dishonor of the item


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Cash Items vs Non-Cash Items

7. May or may not be payable in Dollars.7. Are payable in U.S. Dollars.

6. More expensive to handle, mayrequire individual handling.

6. Are processed in bulk, can beprocessed using automated systems.

5. May or may not have customerinstructions that require special

handling

5. Must not require special handling (noinstructions from customer)

Examples: Notes, bonds, coupons,drafts with attachments.

Example: Checks

4. May or may not have attachments4. Must no t have documents attached

3. May or may not be payable ondemand (future/post or stale dated)

3. Must be payable on demand

2. Do not c reate float (credit is pos tedonly when collection is completed)

2. Create fl oat (time lag betweencrediting and collection, except for on-

us items)

1. Give depositor deferred (delayed)

credit when payment received

1. Give depositor immediate provisional

account credit

Non-cash ItemsCash Items


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Pre-Check 21 Check Collection Flowchart


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Check 21 Highlights

Check truncation Act provides an optional way to

eliminate the physical delivery of ANY check/draft forpayment without a prior agreement/arrangement

Creates a payment instrument: substitute check

New Term: IRD = image-replacement-documents

Establishes a set of broad rules under which collectinginstitutions create an IRD for the original check

The IRD is the legal equivalent of the original item

Allocates liability to the converting ortruncating institution

Gives consumers (not businesses) rights to expeditedcredit when disputes arise about payments made with anitem that has become an IRD (substitute check)

Presupposes a set of standards (ANSI X9.90)


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Substitute Checks

Substi tute Check (IRD) Requirements

Reproduced item must be machinereadable and full-field MICR encoded

Item must include an image of thefront/back of check, plus subsequentendorsements and legend*

Conforms, in paper stock, dimensionsand otherwise to industry standards

Suitable for automated processing

Electronic image of check andSubsti tute check are granted the legalequivalent of the original check

* Legend: This is a legal copy of your check. You canuse it the same way you wou ld use the original check.


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Sample Substitute Check

SpecialLegend

FullMICR

Frontimage

Backimage

Would need to meet dimension/processing standards

ANSI X9.90 Specif icati ons fo r an Image Replacement Docu mentANSI X9.90 Specifi catio ns f or an Image Rep lacemen t Documen t IRDIRD


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Check 21 - Transit ional

Paying

Bank

Original

Check

or

substitute

check

PAPER

ECP

IMAGE

and/or by agreement:

and/or

FederalReserve

System

PAPER

IMAGE

Original Check or

substitute check

or, by agreement:

CHECK

FederalReserve

Check

Relay

Potential transitional Check 21 enabled process:

mixed processing environment with decreased reliance on transportation

Graphic provided by the FRB


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Check 21 - Future

Original Check or substitute

check

Federal Reserve

System

PAPER

IMAGE

or, by agreement:

Paying Bank

ECP

by agreement::

IMAGEand/or

PAPER

Potential longer-term Check 21 enabled process:

paper truncation with image and/or substitute check on request , image truncation

Graphic provided by the FRB


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Electronic Services ATM and Debit Cards

ACH Entries Direct deposits

POS

Cash management transfers

Internet transactions

Telephone initiate transfers

PPD (recurring debits)

Re-presented checks

POP, ARC, WEB, TEL + more

Financial EDI & Merchant capture

Voice Response transfers

Internet Banking transfers Wire/Telephone transfers


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Reg E, CC & J Changes

Regulation E will include check conversions and

payrol l cards (POP, ARC, RCK) New merchantsignage required by Jan 1, 2007

Remotely Created Checks (unsigned drafts) will sh iftthe liability to the bank of first deposit from the

payor bank effective July 1, 2006 (Reg CC & J)


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Transaction Authority & Protection

Signed authorization or salesslip (ACH and non-PINeddebit cards)

Appl ication for ATM, Debi tcard or Internet services

PIN associated with card forPINed ATM/Debit cardtransactions

Login ID and password forInternet transactions

Account and PIN or passcodefor voice response systems

recognition/recordings or IDverification for telephoneinstructions

Regulation E (consumertransactions)

Bank EFT Disclosures

UCC4A Commercial ACHand Funds Transfers

Specific service agreements

NACHA Rules

EFT Switch Rules (likePULSE)

Bankcard processingagreement rules

UCC forgery or other fraudsituations

Authority Protections


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Deposit Agreement Deposit Agreement

General terms and policies

Ownership & beneficiary rules Liability

Withdrawal and deposit limit s orrestrictions

Set-off and OD rules

Statement review and time limits forclaims

Stops, stale or post dated items,charge-backs, restrictive legends,

ACH, wires, dormant..

Reg DD - Truth-in-Savings

Reg CC Deposit Availability

Reg E EFT Disclosures

Reg P Privacy Policy


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Policies & Procedures

Documented policies andprocedures will assist incomplying with regulationsand laws during disputes

Logs and standardizedresponse letters help betterdocument researchfindings and efforts

Verbal notifications andactions are extremelydifficult to prove.

Need to understand

disclosures and requiredresponse and timeframes


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Resource Material

Basics ofNegotiableInstrumentssummary

Reg CCAnnouncementrelated toRemotelyCreated Checks


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Questions & Comments

For more information

Send emails to

[email protected]

or

Visit our web site at

www.verisure.net


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FEDERAL RESERVE SYSTEM

12 CFR Parts 210 and 229

Regulations J and CC; Docket No. R-1226

Collection of Checks and Other Items By Federal Reserve Banks and Funds

Transfers Through Fedwire and Availability of Funds and Collection of Checks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

SUMMARY: The Board of Governors is requesting comment on proposed amendmentsto Regulation CC that would define remotely created checks and create transfer andpresentment warranties for such checks. The purpose of the amendments is to shift

liability for unauthorized remotely created checks to the depositary bank, which isgenerally the bank for the person that initially created and deposited the remotely createdcheck. The Board is also proposing conforming cross-references to the proposed newwarranties in Regulation J.

DATES: Comments on the proposed rule must be received not later than May 3, 2005.

ADDRESSES: You may submit comments, identified by Docket No. R-1226, by any ofthe following methods:

Agency Web Site: http://www.federalreserve.gov. Follow the instructions forsubmitting comments at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm. Federal eRulemaking Portal: http://www.regulations.gov. Follow the

instructions for submitting comments.

E-mail: [email protected]. Include docket number in thesubject line of the message.

FAX: 202/452-3819 or 202/452-3102. Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve

System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551.All public comments are available from the Boards web site atwww.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, except asnecessary for technical reasons. Accordingly, your comments will not be edited to

remove any identifying or contact information. Public comments may also be viewedelectronically or in paper in Room MP-500 of the Boards Martin Building (20th and CStreets, N.W.) between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Adrianne G. Threatt, Counsel(202/452-3554), or Joshua H. Kaplan, Attorney, (202/452-2249), Legal Division; or JackK. Walton, II, Assistant Director (202/452-2660), or Joseph P. Baressi, Senior FinancialServices Analyst (202/452-3959), Division of Reserve Bank Operations and Payment


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Systems; for users of Telecommunication Devices for the Deaf (TDD) only, contact202/263-4869.

SUPPLEMENTARY INFORMATION:

BackgroundRemotely created checks typically are created when the holder of a checkingaccount authorizes a payee to draw a check on that account but does not actually sign thecheck.

1In place of the signature of the account-holder, the remotely created check

generally bears a statement that the customer authorized the check or bears thecustomers printed or typed name. Remotely created checks can be useful paymentdevices. For example, a debtor can authorize a credit card company to create a remotelycreated check by telephone. This may enable the debtor to pay his credit card bill in atimely manner and avoid late charges. Similarly, a person who does not have a creditcard or debit card can purchase an item from a telemarketer by authorizing the seller tocreate a remotely created check.

On the other hand, remotely created checks are vulnerable to fraud because theydo not bear a signature or other readily verifiable indication of authorization. Becauseremotely created checks are cleared in the same manner as other checks, it is difficult tomeasure the use of remotely created checks relative to other types of checks. However,there have been significant consumer and bank complaints identifying cases of allegedfraud using remotely created checks.

Existing Law on Remotely Created Checks

A remotely created check is subject to state law on negotiable instruments,specifically Articles 3 and 4 of the Uniform Commercial Code (UCC) as adopted in eachstate. Under the UCC, a paying bank may charge a customers account for a check onlyif the check is properly payable. A bank generally must recredit its customers accountfor the amount of any unauthorized check it pays.2 This obligation is subject to limiteddefenses.

3In addition, the paying bank may have evidence that the depositor did in fact

authorize the check and is suffering buyers remorse and thus does not have to recreditthe amount of the check.4

A paying bank may, until midnight of the banking day after a check has beenpresented to the bank, return the check to the depositary bank if, among other things, the

1 There is no settled term for these items. The terms remotely created check, telecheck, preauthorizeddrafts, and paper draft are among the terms that describe these items. For purposes of this proposal, the Board refers to these items as remotely created checks. 2 UCC 4-401. 3 For example, the paying bank may be able to assert that the customer failed to notify the bank of the unauthorized item with reasonable promptness (UCC 4-406(c) and (d)).4 The FTCs Telemarketing Sales Rule prohibits a telemarketer from issuing a remotely created check on a consumers deposit account without the consumers express verifiable authorization. The authorization isdeemed verifiable if it is in writing, tape recorded and made available to the consumers bank upon request,or confirmed by a writing sent to the consumer prior to submitting the check for payment. 6 CFR Part 310.

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paying bank believes the check is unauthorized. Once its midnight deadline has passed,the paying bank generally cannot return an unauthorized check to the depositary bank.

5

The provisions of the UCC, cited above, reflect the rule set forth in the seminalcase of Price v. Neal6 that drawees of checks and other drafts must bear the economicloss when the instruments they pay are not properly payable by virtue of the fact that the

drawer did not authorize the item.

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Under the Price v. Neal rule, the paying bank mustbear the economic loss of an unauthorized check with little recourse other than bringingan action against the person that created the unauthorized item. This rule currentlyapplies to all checks, including remotely created checks, in most states.

The Price v. Neal rule reflects the policy that the paying bank, rather than thedepositary bank, is in the best position to judge whether the signature on a check is theauthorized signature of its customer. Remotely created checks, however, do not bear ahandwritten signature of the drawer that can be verified against a signature card. In mostcases, the only means a paying bank would have to verify a remotely created check (andreturn it if it is unauthorized) is by contacting the customer before the midnight deadlinepasses. Even if a paying bank wished to verify the authenticity of remotely created

checks, however, it must first identify remotely created checks drawn on its accounts.Currently, there is no code or feature of a remotely created check that allows this to bedone reliably in an automated manner. For example, remotely created checks bear nomachine-readable identifiers that indicate they are remotely created checks.

Recent Legal Changes to Address Remotely Created Checks

Amendments to the UCCIn recognition of the particular problems regarding remotely created checks, the

National Conference of Commissioners on Uniform State Laws and the American LawInstitute in 2002 approved revisions to Articles 3 and 4 of the UCC that specificallyaddress remotely created checks. The UCC revisions define a remotely created check(using the term remotely-created consumer item) as an item drawn on a consumeraccount, which is not created by the paying bank and does not bear a hand writtensignature purporting to be the signature of the drawer.

8The UCC revisions require a

person that transfers a remotely-created consumer item to warrant that the person onwhose account the item is drawn authorized the issuance of the item in the amount forwhich the item is drawn.

9Accordingly, in the case of remotely-created consumer items

the UCC alters the Price v. Neal rule to provide that the depositary bank and each

5 See UCC 4-301 and 4-302. In limited cases, the paying bank may be able to recover from the presentingbank the amount of a check that it paid under the mistaken belief that the signature of the drawer of thedraft was authorized. This remedy, however, may not be asserted against a person that took the check ingood faith and for value or that in good faith changed position in reliance on the payment or acceptance.UCC 3-418(a) and (c).6 97 Eng. Rep. 871 (K.B. 1762).7 See also Interbank of New York v. Fleet Bank, 730 NYS2d 208 (2001).8 UCC 3-103(16). 9 UCC 3-416(a). A person who transfers an instrument for consideration warrants to the transferee and, ifthe transfer is by indorsement, to any subsequent transferee with respect to a remotely-created consumeritem, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn. See also UCC 4-207(a)(6), 3-417(a)(4), 4-208(a)(4).

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intermediary bank warrants to the paying bank that the remotely-created consumer item isauthorized.

10

These revisions rest on the premise that it is appropriate to impose the burden ofensuring authorization of a remotely created check on the bank whose customer depositedthe remotely created check.

11The warranty provides an economic incentive for the

depositary bank to monitor customers that deposit remotely created checks and shouldhave the effect of limiting the quantity of unauthorized remotely created checks that areintroduced into the check collection system.Amendments to State Laws

Fourteen states have amended their Articles 3 and 4 to include provisionssimilar to those in the UCC.12 No state, however, has adopted the UCC revisions in theirentirety and the revisions adopted by the states are not uniform in their scope orrequirements. In addition to the state codes, some check clearinghouses have adoptedwarranties similar but not identical to the revised UCC that apply to remotely createdchecks collected through the clearinghouse.

For example, in California, a person that transfers a remotely created check

warrants to the transferee that creation of the item according to the terms on its face wasauthorized by the person identified as the drawer.13

The California Commercial Codedefines a remotely created check as follows:

a writing not signed by a customer that is created by a third party under the purportedauthority of the customer for the purpose of charging the customer's account with a bank.A remotely created check shall contain the customer's account number and may containany or all of the following:

(1) The customer's printed or typewritten name. (2) A notation that the customer authorized the draft. (3) The statement "No Signature Required" or words to that effect. A remotely created check shall not include a check purportedly drawn by and bearing

the signature of a fiduciary. . . . Several states use the same warranty language as California, although they define

a remotely created check slightly differently, omitting the California statutesrequirement that a remotely created check contain the customers account number.Vermont generally follows the California language; however, Vermont law includes anexception to account for conflict of law rules.14

The state-by-state approach to the adoption of remotely created check warrantiescomplicates the trail of liability for remotely created checks collected across state lines,as the bank that presents a check may not be subject to the same rules as the paying bank.

10 Normally, the transferor must warrant only that it has no knowledge that the instrument is unauthorized. UCC 3-417(a)(3). 11 UCC 3-416, Official Comment, paragraph 8. The Official Comment notes that the provision supplements FTCs Telemarketing Rule, which requires telemarketers to obtain the customers express verifiable authorization. 12 Those states are California, Colorado, Hawaii, Idaho, Minnesota, Nebraska, New Hampshire, North Dakota, Oregon, Tennessee, Utah, Vermont, West Virginia, and Wisconsin. 13 Cal. U. Com. Code 3416 (2004).14 9A V.S.A. 3-416(e).

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Proposed Rule

The Expedited Funds Availability Act (the EFA Act), Pub. L. 100-86, 101 Stat.635 (codified at 12 U.S.C. 4001 et seq.), authorizes the Board to establish rules regardinglosses and liability among depository institutions in connection with any aspect of thepayment system.

15As noted above, the check collection and return system operates

nationally. As a result, in order for the remotely created check warranties to be effectiveand to prevent conflicts among warranties as they apply to banks, the warranties mustapply uniformly and nationwide. In connection with its proposed amendments toRegulation CC to implement the Check Clearing for the 21

stCentury Act (the Check 21

Act), the Board requested comment on whether it should develop a proposal to amendRegulation CC to adopt the UCC warranties for remotely created checks.16 Seventy-sixcommenters responded to the Boards request for comment on this issue, and all but twosupported the proposal,17 including the Permanent Editorial Board for the UCC.18 Inpublishing the final amendments to Regulation CC to implement the Check 21 Act, theBoard noted its intent to issue a separate proposal regarding remotely created checks.

19

The Boards proposal defines remotely created check as a check that is drawn

on a customer account at a bank, is created by the payee, and does not bear a signature inthe format agreed to by the paying bank and the customer. This definition would includechecks that are created by remote payees or their agents to enable payors to make apayment by check.20

Unlike the UCC amendments, the Boards proposed definition would apply toremotely created checks drawn on either a consumer or a non-consumer account.Although most remotely created checks are believed to be drawn on consumer accounts,these checks could be drawn on business or other accounts as well. In either case, thedepositary bank would appear in the best position to address the potential for fraudulentcheck writing.

A remotely created check often contains a statement that the customer authorizedthe check, the customers printed or typed name, or a similar notation. Generally, apaying bank and its customer agree to a form of authorization for checks drawn on the

15 The Board is authorized to impose on or allocate among depository institutions the risks of loss andliability in connection with any aspect of the payment system, including the receipt, payment, collection, or clearing of checks, and any related function of the payment system with respect to checks. Such liability may not exceed the amount of the check giving rise to the loss or liability, and, where there is bad faith, other damages, if any, suffered as a proximate consequence of any act or omission giving rise to the loss orliability. 12 U.S.C. 4010(f).16 69 FR 1470, 1482, Jan. 8, 2004. 17 One commenter argued that it would be inappropriate for the Board to adopt the UCC warranty forremotely created checks because it has not yet been adopted by all states. The other commenter stated that it is neither in favor nor opposed to incorporating the UCC warranty but is unsure how such a warranty in Regulation CC would be enforced. 18 The Permanent Editorial Board for the UCC stated that the lack of uniform state law creates a problemthat a remotely-created-items warranty in Regulation CC would resolve. Under the existing non-uniformstate of play, a company creating large numbers of these items could avoid the new uniform [UCC] transferand presentment warranties and continue to insulate itself and its depositary banks by selecting depositary banks in states that have not adopted these warranties. 19 69 FR 47290, 47306, Aug. 4, 2004. 20 The proposed Commentary would provide that a check created by the payees agent would be deemed to be created by the payee. Therefore, if a telemarketer hired a service provider to create checks drawn on the accounts of the telemarketers customers, those checks would be covered by the definition.

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customers account. These agreed-upon formats most often take the form of ahandwritten signature or a specific type of machine-applied signature. The proposeddefinition covers remotely created checks that do not bear a signature in the formatagreed to between the paying bank and its customer. Accordingly, a check that is createdby someone other than the drawer and on which the drawers signature is applied using

the authorization format agreed to by the paying bank and its customer (such as ahandwritten signature), is not a remotely created check under the proposal. For example,a typical forged check, such as a stolen personal check fraudulently signed by a personother than the drawer, is not covered by the proposed definition of a remotely createdcheck. In this regard, the existing system of warranties appears suitable for those types ofsituations because the paying bank can monitor the format and the signatures it hasagreed to with its customer.

The Board proposes to create transfer and presentment warranties that wouldapply to remotely created checks that are transferred or presented by banks to otherbanks. Under the proposed warranties, any transferor bank, collecting bank, orpresenting bank would warrant that the remotely created check that it is transferring or

presenting is authorized according to all of its terms by the person on whose account thecheck is drawn. The proposed warranties would apply only to banks and wouldultimately shift liability for the loss created by an unauthorized remotely created check tothe depositary bank. A paying bank would not be able to assert a warranty claim underthe Boards proposed rule directly against a nonbank payee that created or transferred anunauthorized remotely created check. The proposed transfer and presentment warrantiesdiffer in this respect from the UCC provisions, which apply to any person that transfers aremotely created check. However, the bank would likely have a claim under other lawagainst such a payee. The Boards proposal also differs from the UCC provisions to theextent that the Boards proposed warranties cover all of the terms of the check while theUCC provisions cover only authorization of the issuance of the check in the amount forwhich the check is drawn. The Board is also proposing conforming cross-references tothe proposed new warranties in Regulation J.

The Board requests comment on all aspects of the proposed definition of aremotely created check and the scope of the proposed transfer and presentment warranty.In particular, the Board requests comment on how best to distinguish remotely createdchecks, to which the proposed warranty would apply, from other fraudulent checks,which would not be subject to the proposed warranty. The proposed definition ofremotely created check attempts to make this distinction by stating that the check doesnot bear a signature in the format agreed to by the paying bank and the customer. Apayee that creates an unauthorized remotely created check could circumvent thisrequirement, however, by applying a handwritten signature purporting to be the signatureof a consumer. Similarly, a traditional forged check that contains a signature in adifferent format than that agreed to by the paying bank and the customer could be subjectto the proposed warranty.

There are few statistics or other quantitative data on remotely created checks;therefore, the Board also seeks comment on the prevalence and uses of remotely createdchecks generally. The Board also requests comment on the general characteristics ofremotely created checks, including the manner by which such checks typically reflect theaccount-holders authorization. In addition, the Board invites comment on whether it is

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appropriate to cover all remotely created checks or to follow the UCC approach ofcovering only remotely-created consumer items.

Additional Requests for Comment

There are other approaches to addressing the risks associated with remotely

created checks. The Board invites comment on whether a different approach toaddressing this issue is more appropriate. In particular, the Board requests comment ontwo alternatives.Extension of the Midnight Deadline

Under the proposal described above, a paying bank would recover its lossescaused by an unauthorized remotely created check by making a warranty claim outside ofthe check collection and return system. As an alternative, the rule could potentially allowsuch a paying bank to return the unauthorized remotely created check through the checksystem by extending the UCC midnight deadline for a period of time (such as 60 days).Such a rule could reduce the cost of recovering losses suffered in paying unauthorizedremotely created checks and is similar to the return scheme for unauthorized ACH

transactions. However, the rule would extend the midnight deadline considerably, andthereby delay finality of payment and discharge of the underlying obligation with respectto remotely created checks. Commenters that favor the extension of the midnightdeadline are encouraged to explain their preference for this approach, including how suchan approach would be implemented under the current check collection process.Allow the State Legislatures to Adopt the UCC Amendments

The Board could refrain from or delay acting on the remotely created check issueand allow the states to adopt the UCC warranty, or some variation thereof, on their own.Check law traditionally has been the province of state law, although a substantial numberof federal laws and regulations apply to the check collection system as well. The pace atwhich the states have adopted the UCC changes has been slow and that might be anindication that consensus has not been reached on whether there should be a change tothe warranties for remotely created checks.MICR Line Identifier

Regardless of whether the Board provides a special warranty or return rule forremotely created checks, it may be useful to have a means of identifying these checks sothat banks can better protect themselves and their customers against fraud. Identifyingremotely created checks could be accomplished by assigning digits in the ExternalProcessing Code (EPC) Field (commonly referred to as Position 44) of the MICR line toremotely created checks. Four digits would appear to be necessary to identify a forwardand return original remotely created check and a substitute check version.

The practical utility of a MICR line code for identifying fraudulent checks may below in practice, however, because a person depositing an unauthorized remotely createdcheck would be unlikely to place an EPC identifier in the MICR line. Furthermore,requiring a payee, rather than a bank, to encode in position 44 of the MICR line may leadto inconsistent results and operational problems.

Paperwork Reduction Act

In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3506;

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5 CFR 1320 Appendix A.1), the Board has reviewed the proposed rule under authoritydelegated to the Board by the Office of Management and Budget. The proposed rulecontains one collection of information pursuant to the Paperwork Reduction Act. Inaddition to the proposed rule, the Board requests comment on whether banks should berequired to ensure that a remotely created check includes identifying digits in the MICR

line. The MICR line requirement would be deemed a collection of information, however,the Board believes that the paperwork burden associated with such a requirement wouldbe minimal. The Board invites comment on the paperwork burden associated with theMICR line requirement.

Regulatory Flexibility Act

In accordance with the Regulatory Flexibility Act (RFA), an agency must publishan initial regulatory flexibility analysis with its proposed rule, unless the agency certifiesthat the rule will not have a significant economic impact on a substantial number of smallentities. (5 U.S.C. 601-612.) The Board believes that, if adopted as proposed, the rulewould not have a significant economic impact on a substantial number of small entities.

The RFA requires agencies to examine the objectives, costs and other economicimplications on the entities affected by the rule. (5 U.S.C. 603.) Under section 3 of theSmall Business Act, as implemented at 13 CFR part 121, subpart A, a bank is considereda small entity or small bank if it has $150 million or less in assets. Based onDecember 2004 call report data, the Board estimates that there are approximately 13,666depository institutions with assets of $150 million or less. The proposed amendments toRegulation CC create a definition of a remotely created check and warranties that applywhen a remotely created check is transferred or presented. The proposed amendmentswould require any bank that transfers or presents a remotely created check to warrant thatthe person on whose account the remotely created check is drawn authorized the issuanceof the check according to the terms stated on the check. The purpose of the proposedamendments is to place the liability for an unauthorized remotely created check on thebank that is in the best position to prevent the loss. By shifting the liability to the bank inthe best position to prevent the loss caused by the payment of an unauthorized remotelycreated check, the Board anticipates that the proposed amendments will reduce costs forall banks that handle remotely created checks. Banks seeking to minimize the risk ofliability for transferring remotely created checks will likely screen with greater scrutinycustomers seeking to deposit remotely created checks. The Board believes that thecontrols that small institutions will develop and implement to minimize the risk ofaccepting unauthorized remotely created checks for deposit likely would pose a minimalnegative economic impact on those entities. The Board invites comment on the economicimpact of the proposed warranties on small institutions.

The RFA requires agencies to identify all relevant Federal rules which mayduplicate, overlap or conflict with the proposed rule. As noted above, the BoardsRegulation J includes cross-references to the warranties set forth in Regulation CC andthe proposed rule would amend such cross-references to include the proposed warranties.As also noted above, the proposed rule would overlap with 14 state codes whichpresently provide warranties for remotely created checks. The RFA also requiresagencies to describe any significant alternatives to the proposed rule. The alternatives arediscussed above and comment is requested on the proposed alternatives.

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List of Subjects in 12 CFR Parts 210 and 229

Banks, Banking, Federal Reserve System, Reporting and recordkeepingrequirements.

Authority and Issuance

For the reasons set forth in the preamble, the Board is proposing to amend parts210 and 229 of chapter II of title 12 of the Code of Federal Regulations as set forthbelow:

PART 210-COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL

RESERVE BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE

(REGULATION J)

1. The authority citation for part 210 continues to read as follows:Authority: 12 USC 248(i) and (j), 12 USC 342, 12 USC 464, 12 USC 4001 et

seq., 12 USC 5001-5018.

2. In section 210.5, revise paragraph (a)(3) to read as follows: 210.5 Senders agreement; recovery by Reserve Bank

(a) * * ** * * * *

(3) Warranties for all electronic items. The sender makes all the warranties setforth in and subject to the terms of 4207 of the UCC for an electronic item as if it werean item subject to the UCC and makes the warranties set forth in and subject to the termsof 229.34(c) and (d) of this chapter for an electronic item as if it were a check subject tothat section.* * * * *

3. In section 210.6, revise paragraph (b)(2) to read as follows: 210.6 Status, warranties, and liability of Reserve Bank

* * * * *(b) * * *(2) Warranties for all electronic items. The Reserve Bank makes all the warranties

set forth in and subject to the terms of 4207 of the UCC for an electronic item as if itwere an item subject to the UCC and makes the warranties set forth in and subject to theterms of 229.34(c) and (d) of this chapter for an electronic item as if it were a checksubject to that section.* * * * *

4. In section 210.9, revise paragraph (b)(5) to read as follows: 210.9 Settlement and payment

* * * * *(b) * * *(5) Manner of settlement. Settlement with a Reserve Bank under paragraphs

(b)(1) through (4) of this section shall be made by debit to an account on the ReserveBank's books, cash, or other form of settlement to which the Reserve Bank agrees, except

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that the Reserve Bank may, in its discretion, obtain settlement by charging the payingbank's account. A paying bank may not set off against the amount of a settlement underthis section the amount of a claim with respect to another cash item, cash letter, or otherclaim under section 229.34(c) and (d) of this chapter (Regulation CC) or other law.* * * * *

PART 229 AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS

(REGULATION CC)

5. The authority citation for part 229 continues to read as follows:Authority: 12 U.S.C. 4001 et seq., 12 U.S.C. 5001-5018.

6. In 229.2, add a new paragraph (fff) to read as follows: 229.2 Definitions

* * * * *(fff) Remotely created check means a check that is drawn on a customer account

at a bank, is created by the payee, and does not bear a signature in the format agreed to bythe paying bank and the customer.

7. In 229.34, redesignate paragraphs (d), (e), and (f) as paragraphs (e), (f), and(g), and add a new paragraph (d) to read as follows: 229.34 Warranties

* * * * *(d) Transfer and presentment warranties with respect to a remotely created check.A bank that transfers or presents a remotely created check and receives a

settlement or other consideration warrants to the transferee bank, any subsequent collecting bank, and the paying bank that the person on whose account the remotely created check is drawn authorized the issuance of the check according to the terms statedon the check. * * * * *

8. In 229.43, revise paragraph (b)(3) to read as follows: 229.43 Checks Payable in Guam, American Samoa, and the Northern Mariana

Islands

* * * * * (b) Rules applicable to Pacific islands checks. * * * * * * * * (3) 229.34(c)(2), (c)(3), (d), (e), and (f); * * * * *

9. In Appendix E to part 229:a. Under paragraph II., section 229.2, paragraph (OO) is revised and a new

paragraph (FFF) is added.b. Under paragraph XX., section 229.34, redesignate paragraphs D., E., and F. as

paragraphs E., F., and G., and add a new paragraph D.APPENDIX E TO PART 229 COMMENTARY

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* * * * * II. Section 229.2 Definitions

* * * * *OO. 229.2(oo) Interest Compensation

1. This calculation of interest compensation derives from UCC 4A-506(b). (See 229.34(e) and 229.36(f).)* * * * *

FFF. 229.2(fff) Remotely Created Check1. A remotely created check may be drawn on a consumer account or an account

held by a corporation, unincorporated company, partnership, government unit orinstrumentality, trust, or any other entity or organization. In accordance with principlesof the law of agency, an agent of a payee is deemed to be the payee for purposes of thedefinition of remotely created checks.

2. A check authorized by a consumer over the telephone, which is created by thepayee, and which bears a legend on the signature line such as Authorized by Drawer is

an example of a remotely created check. A check that bears the signature of the customeror a signature purporting to be the signature of the customer in the format agreed to bythe paying bank and the customer is not a remotely created check. For example, theagreed-upon format is often a handwritten signature, or in the case of corporate checks, amachine-applied signature. In these cases, a check that bears a handwritten or machine-applied signature (regardless of whether the signature was authentic) would not be aremotely created check. A typical forged check, such as a stolen personal checkfraudulently signed by a person other than the drawer, is not covered by the definition ofa remotely created check.

3. The definition of a remotely created check includes a remotely created checkthat has been reconverted to a substitute check.* * * * *

XX. Section 229.34 Warranties* * * * *

D. 229.34(d) Transfer and presentment warranties1. The transfer and presentment warranties for remotely created checks

supplement the Federal Trade Commissions Telemarketing Sales Rule, which requirestelemarketers that submit checks for payment to obtain the customers express verifiableauthorization (the authorization may be either in writing or tape recorded and must bemade available upon request to the customers bank). 16 C.F.R. 310.3(a)(3).

2. Any transferring bank, collecting bank, or presenting bank warrants that theremotely created check that it is transferring or presenting is authorized according to allof its terms by the person on whose account the check is drawn. The warranties are givenonly by banks and only to subsequent banks in the collection chain. The warrantiesultimately shift liability for the loss created by an unauthorized remotely created check tothe depositary bank. The depositary bank cannot assert the transfer and presentmentwarranties against a depositor; however, it would likely have a claim under other lawsagainst that person or could choose to transfer the liability by contract. The transfer andpresentment warranties differ from the UCC warranty provisions, which are given by anyperson that transfers a remotely created check including a nonbank, apply only to

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remotely created consumer checks, and cover authorization of the issuance of the checkin the amount for which the check is drawn.

3. The transfer and presentment warranties for a remotely created check apply to aremotely created check that has been reconverted to a substitute check.* * * * *

By order of the Board of Governors of the Federal Reserve System, February 28,2005.

J enni f er J . J ohnson ( si gned)Jennifer J. JohnsonSecretary of the Board.

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Negotiable Instrument Basics

Pivotal Financial Resources Page - 1

FUNDAMENTALS OF NEGOTIABLE INSTRUMENTS

The guidelines and rules that govern negotiable instruments are described by several legaldocuments, but most importantly in the Uniform Commercial Code. The UCC was adopted in1953 by most States, (Louisiana has some exceptions to the UCC), and is based on thepredecessor called the Negotiable Instruments Laws (NIL). The UCC is divided into sections that

focus on specific types of legal documents, and Negotiable Instruments are addressed in Article 3.Rules that apply to bank deposits and the collection of negotiable instruments are contained inArticle 4 and there are some special requirements related to Funds Transfers in Article 4A. Theinformation shown below will highlight some of the basic information about the negotiable itemsthat are customarily handed by financial institutions.

In the ordinary course of business, an employee will be called upon to handle many kinds ofinstruments. It is imperative that they know and recognize each kind so that they will know whattreatment is expected for each.

By far, the most common negotiable instrument is what is known as a check. Other commontypes are drafts, coupons, bonds, and money orders.

CHECKS: A check is a written order by a depositor directing his bank to pay a certain sum ofmoney from collected funds that he has on deposit. Checks may be payable to an individual,corporation, or an association or they may be payable to the bearer or cash. Checks are thoughtof as three party agreements. They are:

1. Maker: The person or firm who is ordering the money paid. The maker's signature willusually be located in the lower right hand corner of the check.

2. Payee: The person or firm to whom the check is payable. The payee will usually followthe words "Pay to the order of...".

3. Drawee Bank: The bank on which the check is drawn. The name of the bank willnormally appear in the lower left hand corner of the check, across the top of the check,or in another prominent spot on the face of the check.

A check must meet five characteristics as set forth by the Uniform Commercial Code to qualify asa LEGAL negotiable instrument. The five characteristics include the following:

1. The Check must be in writing (written longhand, typed or printed) and signed by themaker. Note: A properly drawn check WRITTEN IN PENCIL is negotiable. However, it isNOT considered good practice to accept such a check for cashing and it is not a policy ofthis institution to cash checks written in pencil.

2. The check must name the bank or financial institution on which it is drawn (the drawee).

3. The check must contain an unconditional order to pay definite sum of money.

4. The check must be payable on demand or at a fixed or determinable date.

5. The check must contain Words of Negotiability: "Pay to the order of...", "Pay to thebearer...", or similar words.


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TYPES OF CHECKS

The most common checks routinely encountered are described below:

Personal Checks: A personal check drawn against an individual or joint checking account.

Company Checks: A company check is one where the maker is a company or corporation.Such checks will be signed by one or more persons who are authorized to sign on behalf ofthe company.

Voucher Checks: This is a type of check used by some companies. It contains a detachableportion at the bottom or side of the check that is a receipt or explanation of the purpose of thecheck. There are two things you must remember about voucher checks:

a. It is rare, but some of these require that the voucher portion remain attached to thecheck while others direct the payee to detach the voucher before cashing.

b. Watch for special instructions for endorsing the check. These instructions may be

found on the back of the check or the voucher portion. Because voucher checks vary,it is important that you read all instructions on both the check and the voucher portion.

Government Checks: These checks are issued by the U.S. government to pay Federalemployees, pay its debts, pay pensions, social security, and other legal obligations. NOTE:Because these checks are easily stolen, a teller should be particularly cautious whenaccepting them. ALWAYS IDENTIFY THE CUSTOMER. Customers presenting thesechecks must be identified by an account number or referred to an officer.

Traveler's Checks: Traveler's checks are sold to the public for a fee by certain companies andbanks. Their purpose is to provide a simple means of identifying the holder, who will normallybe trying to cash them in places where they are not known. The purchaser must sign theirname once on the face of the check at the time they buy them and a second time in THEPRESENCE OF THE TELLER or business person who is considering cashing them.

Cashier's Checks: A Cashier's check is normally defined as a check that a financial institutiondraws on itself; that is, the maker and the drawee are the same. Such checks are sold tocustomers for cash. Lost or stolen checks issued required an indemnity bond prior to thereissue or voiding a check. (Sometimes called Teller or Official Checks).

Money Orders: Bank or personal money orders are drawn on a bank's own funds. Thesechecks have indicated on them a maximum amount they can be negotiated for and are issuedfor small amounts.

DRAFTS: A draft is a negotiable order to pay a definite sum of money, either on demand or atsome future date. The draft is addressed to the person or firm who is being asked to pay.Compare this definition with that of a check and you will note the primary difference.

1. The drawee of a check is always a financial institution, but the drawee of a draft maybe any person or company.

2. Checks may be charged to the maker's checking account without further notice to orapproval from the maker. Drafts, on the other hand, are never automaticallychargeable to a checking account, but must be presented to the maker. They are then


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free to refuse payment or may pay in cash or any other manner. Since institutionshave no way to determine without presenting to the maker whether any drafts will bepaid, tellers would not pay out cash for a draft without the approval of a supervisor orofficer.

TYPES OF DRAFTS:

Some of the more common drafts are listed below:

Sight Drafts: A sight draft is simply any draft that is to be paid immediately upon viewing by thedrawee. A sight draft and a demand draft are both the same.

Time Drafts: A time draft is any draft that has been drawn payable at some future date. Thismay be expressed as a specific future date, or in terms of a specific lapse of time after thedate of the draft of after presentation to the drawee. Time drafts are principally used to extendcredit to a purchaser of goods or to allow for arrival from distant points.

Insurance Drafts: Many insurance companies pay policy claims with a draft rather than with a

check. The normal reason is that in order to provide fast claim service; they permit many oftheir agents to sign and deliver claim drafts.

Each agent then sends the claim report to the home office, which will have the opportunity toexamine it before making payment on the draft. If the agent was in error, the company can refuseto pay the draft. No such opportunity would exist if checks were used.

Most insurance companies will print on their claim drafts "Payable through" or "collect through" anamed bank. Thus, those instruments which appear to be drawn on a bank, but which read"through" the bank, are not checks but drafts. Discretion should be used when paying drafts,depending on status of customer, many are sent for collection; therefore, immediate credit is notalways given.

BOND COUPONS: A bond coupon is a special type of draft payable to the bearer on a specifieddate. The issuer of the bond has coupons attached to it that pay interest as they become due.Any owner of the bond may clip the maturing coupon and so collect his interest. Most bondcoupons are sent to the collection area for further credit to the customer.

SAVINGS BONDS: Savings bonds are issued by the U.S. Government to raise revenue. Thesebonds earn interest every month and reach maturity after a specified number of years.


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FUNCTIONS OF ENDORSEMENTS

In order to process checks intelligently and safely, one must learn about the most common typesof endorsements and the rules and regulations that govern each.

The most common meaning of "endorse" is to give one's name or support to someone. When you

sign your name on the back of your paycheck (or any other check made out to you) so that youcan cash it, you are also guaranteeing (to the person who cashes it for you) that the check isgenuine. Thus, the first function of an unqualified endorsement is to guarantee that the check isgenuine and good.

Endorsements actually perform four main functions :

1. To guarantee that the check is genuine.2. To guarantee that all previous endorsements are genuine.3. To transfer title to another person or organization.4. To warrant that there is no knowledge of any claim, notice of default, insolvency, fraud orother reasons that would result in the dishonor of the item. Additionally, the endorser received

the item in good faith and consideration.

NOTE: For an endorsement to be acceptable, the endorser must sign his name EXACTLY as itappears on the face of the check. If the payee's name is misspelled on the face of the check, hemust first sign the check EXACTLY as it appears on the face, then underneath he must sign hisname again, using his correct legal signature.

TYPES OF ENDORSEMENTS:

Since the manner in which an endorsement is made will determine to whom ownership is beingtransferred and under what conditions, it is imperative that a teller understand the meaning ofeach of the various types of endorsements. Several types of endorsements will render a checkunsuitable for cashing, while other types will allow "deposit only" to a specific account.

INDIVIDUAL AND JOINT ENDORSEMENTS:The most common type of endorsement you will see is the individual endorsement (the signatureof one person). When you endorse your payroll check, for example, that is an individualendorsement. On occasion, however, you will encounter joint endorsements involving twosignatures. When a check is made payable to two persons, both must ordinarily endorse it.

ENDORSEMENT BY MARK:On a very rare occasion, a teller may encounter a situation in which the payee of a check cannotwrite his endorsement, either because he is illiterate and does not know how to write his name, orbecause he is ill and is unable to write. In such cases, the payee may endorse the check bymark, which must be witnessed by two literate people. The witness must give their full name andaddress. The payee must be positively identified and the fact that he cannot write must beverified. If you encounter a situation involving an endorsement by mark, you should refer it to yoursupervisor.

BLANK ENDORSEMENT:When the payee is cashing the check, a blank endorsement includes ONLY the payee's signatureon the back of the check. When the payee is not the one getting the money, a blank endorsementincludes the payee's signature plus the check casher's signature. A check endorsed in a blankbecomes bearer paper and can be cashed upon presentation. Since such a check, if lost orstolen, is negotiable by anyone (bearer), the teller should be sure to identify the person cashing it.


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SPECIAL ENDORSEMENTS:When the endorser wants to protect himself from loss (in case the check is lost or stolen), heendorses the check so that it is payable to and negotiated by a specific person or organization.This consists of such words as "Pay To" a designated person followed by the signature of theholder. Such a check cannot be further negotiated with out the endorsement of that designatedperson.

RESTRICTIVE ENDORSEMENT:A restrictive endorsement limits the use to which the person acquiring the check can make use ofthe proceeds. A check endorsed "For Deposit Only" and signed by the holder can only becredited to a financial institution account in the name of the endorser. Not only must the nextholder of such a check be financial institution, but also a restrictive endorsement cannot befollowed by any other endorsements except those necessary to collect the check from the draweebank. Thus, after crediting the endorser's account, a bank could not endorse the check over toany other person outside the check collection channels. The key word on a restrictiveendorsement is the word "only".

CONDITIONAL ENDORSEMENT:

A conditional endorsement is one that prescribes certain conditions to be met before ownershipof the check is to be transferred. Often it is impossible to determine whether the conditionshave been met simply by examining the check. Such conditions usually refer to the completion ofa certain job or the happening of some other event. If a conditional endorsement on a check ispresented to a teller, the holder must be referred to a supervisor.

QUALIFIED ENDORSEMENT:When a person wants to cash a check, but does not want to assume liability in case the check isdishonored, he uses a qualified endorsement. In most cases, such an endorsement is used bythe original payee to convey title of the check to another party. For example, a check has beendrawn payable to a lawyer when the funds were really meant to be paid to one of his clients.The lawyer might endorse the check to his client without recourse, who would then provide anendorsement that did make the usual guarantees. The words "Without Recourse" will alwaysappear on a qualified endorsement and should be referred to your supervisor.

MULTIPLE ENDORSEMENTS:Any check which has been passed from one holder to another several times before it is placedinto the banking system will bear a number of endorsements which track its chain of title. There isno limit to the number of endorsements in blank that may appear on a check, so long as each isfollowed by the endorsement of the person specified in the preceding endorsement. Unless eachendorsement is dated, it might be difficult to tell in which sequence they had been made. Thus,custom has dictated that each subsequent endorsement be placed directly beneath the precedingone. In deciding whether any check has been acceptably endorsed for cashing or for deposit, thelast endorsement should govern.

ACCOMMODATION ENDORSEMENTS:An accommodation endorsement is an endorsement in blank written by a person who has nointerest or title to the check, but who has lent the weight of his name to an endorser who could nothave otherwise cashed the check. For example, if a total stranger attempted to cash a checkdrawn on another institution, we should decline to do so unless this person could induce a personwhose financial responsibility is known to us or who has an account with our institution, and iswilling to endorse the check being presented. We may hold our customer's funds in his accountwith us until the check clears, as he is responsible for the check if he gives an accommodatingendorsement. You always want to remind our customer that he will be responsible for the check if


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he endorses it as an accommodation. Many customers do not realize that if the check is returnedit will be deducted from their account.

RUBBER STAMP ENDORSEMENTS:Many companies use a rubber stamp to affix their endorsement since they handle hundreds ofchecks daily. Most rubber stamp endorsements are restrictive, but even if not, no check which

bears a rubber stamp endorsement without a manual (handwritten) signature should ever becashed.

Basics of Negotiable Instruments

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