Check Exceptions - epcor.orgCheck Signature UCC 4: When a Bank May Charge an Account An account may...

Check Exceptions

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recognized and licensed providers of ACH education, publications and support. Regional

Payments Associations are directly engaged in the NACHA rulemaking process and Accredited

ACH Professional (AAP) program. NACHA owns the copyright for the NACHA Operating Rules &

Guidelines. The Accredited ACH Professional (AAP) is a service mark of NACHA.

©2015, EPCOR®. All Rights Reserved.

What will you learn?

After this course, you’ll be able to:

• Identify the appropriate law or regulation that

applies to a check exception situation

• Given a scenario, decide how to appropriately

handle a check exception

CHECK EXCEPTION

GROUNDWORK


Common Check Exceptions


1. Altered

2. Counterfeit

3. Duplicate

4. Forged Endorsement

5. Forged Signature

6. Holder in Due Course

7. Missing Endorsement

8. Missing Signature

9. Stop Payment

10.Unauthorized Remotely

Created Check

Altered vs. Counterfeit

Based on UCC Transfer and

Presentment Warranties:

• A Paying Bank could have

up to 3 years to deal

directly with a Depositary

Bank for an altered item

because the Depositary

Bank warrants the item

was not altered



Based on UCC Transfer and Presentment

Warranties:

• Paying Bank only has 24 hours to return a

counterfeit item, Bank of First Deposit

liability is limited

• Paying Bank carries burden to catch

fraudulent item timely



UCC Warranties


Transfer

Warranties

Presentment

Warranties

UCC 3-416 UCC 3-417

UCC 4-207 UCC 4-208

Duplicate Item Warranty


An item will

NOT

pay twice!

Duplicate Item Options

UCC/Regulation CC Return Timeframe

Option 1

Return back to Bank of

First Deposit by 4 PM

(local time) of Depositary

Bank on the 2nd business

day following day of

presentment (24 Hours)

Option 2

Submit a “PAID”

adjustment claim through

the Federal Reserve Bank


Forged Drawer Signature

• Law dates back to 1762 court case

• Paying Bank is in the best position to detect

a forged Drawer signature

• UCC 3-417(a)

• UCC 4-208(a)


Paying

Bank

Drawer

Signature

Forged Endorsement

Paying Bank can deal directly with Depositary

Bank for up to 3 years per UCC 3-118


UCC 3: Definitions

Holder

Person that comes

into possession of a

negotiable instrument

Holder in Due Course (HIDC)

Person who takes an

instrument in good faith

and value without

knowing the signature

was unauthorized, altered,

overdue or dishonored

(UCC 3-302)


HIDC Example


BOFD/HIDC

CLAIM

Drawer

4)

1) Goods Purchased

1) Check Deposited

Bank of First Deposit

2) Drawer issues Stop Pay order

2) Goods found

to be fraudulent

3) Chargeback Attempt;

Payee Closed Account

Paying Bank

3) Returned

Salesperson

Payee/Depositor

PAY

Missing Endorsement

UCC 3-417 and UCC 4-208

A Paying Bank has the right to go back to the

Depositary Bank with a Presentment Warranty

claim if an endorsement is “missing”


Missing Signature

UCC 3-417(a) and UCC 4-208(a)

The Paying Bank is in the best position to

check signatures against a signature card!


Check Signature

UCC 4: When a Bank May Charge

an Account

An account may be charged creating an

overdraft, however; an account holder is

NOT liable for the overdraft if:

1. they did not sign the item or

2. benefit from the item


Stop Payments

• UCC 4-403 – Any person authorized on

an account may place a stop payment

on a check

– The order stays in effect for 6 months, but

lapses after 14 calendar days if oral request

is not confirmed on record

• UCC 3-312 – a stop payment may NOT

be placed on a cashier’s, teller’s or

certified check



Form MUST include

Claim becomes enforceable

at the later:

1. Time claim is asserted or

2. 90th day following the date

of the check

If original check is later

presented, signer agrees to:

1. Refund payment or

2. Pay amount of check to

HIDC

Declaration of Loss Form

Unauthorized RCC


STEPS:1. File Unauthorized RCC adjustment through

Federal Reserve Bank

2. Within 90 calendar days

3. Get sworn statement from account holder

4. Provide legible copy of front and back of check

Check General Information


UCC 4-406

1. Statement must be provided to customer and

they must exercise reasonable promptness in

examining and reporting unauthorized or

altered transactions

2. “Reasonable Promptness” time frame should

be outlined in FI’s Deposit Agreement

3. A customer who does not within 1 year after

the statement is available reports

unauthorized or altered activity, they are

precluded from asserting against the bank


Check Rules and Regulations

• Code of Federal Regulations (CFR) – Title 12

(Banks and Banking)

– Codification of the general and permanent rules

published by the executive departments and

agencies of the Federal Government

• Part 210 – Collection of checks and handling check returns

(Regulation J Subpart A)

• Part 229-Availability of Funds and Collection of Checks

(Regulation CC)


Check Images

• There are no laws or regulations that cover

check images or check image exchange

• Covered by agreement with exchange

partners or clearing house rules


Determine what Channel the Image Cleared Through

Cleared through Federal

Reserve Bank

Regulation J and Operating Circular 3 apply

Cleared through ECCHO ECCHO Rules apply

Cleared through the

Clearing House

(CHECCS)Clearing House Electronic Check

Clearing System Rules or Bi-lateral or

Multi-lateral agreements may apply

FRB Adjustments

Covered by Operating Circular 3 (OC3)


OC3 = FRB instructions for

submitting an adjustment request

FRB will only determine that the form was submitted timely and was

substantially completed

OC3 states that FRB assumes “no” responsibility for determining whether

statements on an adjustment form are correct or arbitrating disputes

between banks

A bank may be subject to criminal penalties under Federal and/or State

law if they knowingly make a false statement to influence action of the

FRB in granting a credit

FRB Adjustments

• FRB does not process adjustments for

$25 or less except for these adjustment

types:

– PAID (Duplicate Entry)

– NOI (Not Our Item)

– ERR (Entry in Error)


LET’S WORK

THROUGH

SOME CHECK

EXCEPTIONS


Check Exception

Scenarios

Instructions

• Work in small groups

• Pick a spokesperson and someone to scribe

• Read scenario

• Answer questions for each scenario


Forged Endorsement or Not?

Gayle wrote a check to Cash

Money Now on the 1st for a $500

payday loan. Cash Money Now

said they would hold the check

until the 30th of the month.


Gayle had the cash to repay Cash Money Now on the 15th

so she went and paid them cash and they gave her check

back. The check was taken from Gayle’s car two days later

and was used to pay for auto repairs at The Collision

Center. The Collision Center endorsed the check. Gayle

calls the FI the next morning after the check posts to her

account. What can be done to help Gayle in this situation?

Forged Endorsement or Not?

1. Would a return or adjustment be done?

2. What return code/adjustment type should be used?

3. Why was this course of action decided upon?

4. What is your timeframe?

5. What Rule, Regulation or Law applies to this situation?


Altered Check

Bank of USA sends a letter to The Credit Union stating that

a check one of their members deposited for $9,000 has been

altered. This check cleared their customer’s account in May.

The Credit Union does research and confirms the item was

altered from $1,000. The Credit Union member no longer has

the money in his account. Who takes the loss?


Altered Check

1. Would a return or adjustment be done?

2. What return code/adjustment type should be used?

3. Why was this course of action decided upon?

4. What is your timeframe?

5. If you would have been outside of this timeframe could

something else be done?



Official Check

Star National Bank issues Betty Burns a cashier’s check for

the overpayment made when she paid off her car loan on

July 1, 2015. Betty comes in two months later and claims

she cannot find this check and would like them to issue her

another one. What would your institution do in this

situation?


Official Check

1. Would your institution issue a new check?

2. Why or Why Not?

3. Would your institution require any documentation from

Betty?

4. If a new check is issued how can your institution ensure

the original will not post?



Duplicate Claim Letter

Dee in the Operations area

of Small Town Bank

received a letter today from

MegaBank stating they

received a duplicate claim

adjustment entry from the

Federal Reserve Bank.


The letter states that after reviewing the item, it appeared

that the check first cleared Small Town’s Bank via Mobile

Deposit Capture and MegaBank claims Small Town Bank

owes them for the adjustment entry. What would your

institution do in this situation?

Duplicate Claim Letter

1. Would you send the money to Mega Bank?

2. Why or why not?

3. What Regulation Warranty applies to this situation?


Missing Endorsement

A financial institution calls

EPCOR on June 1 concerning a

check that cleared back in April.

They say that the check was

payable to one business,

however; a different business

endorsed the check. Would this


be considered a forgery or altered item and should the

Payee or Payor complete an affidavit?

Missing Endorsement

1. Would this check be considered altered or a forged

endorsement?

2. What warranty was breached?

3. What course of action can be taken?

4. Would an affidavit be required and by whom?

5. What, Rule, Regulation or Law applies to this situation?


Missing Signature

John goes to Quick Cash to get a loan for $100. He forgets

to sign the check that he gives them for repayment. On July

13, the check tries to clear John’s account but it is returned

NSF. The check casher goes to the bank on July 17 to see if

the item will clear. The teller cashes the check at that time

since John had the money in his account. John calls the

bank on July 30 after receiving his statement and claims he

wrote the check, but never signed it so the teller should not

have cashed it. What could be done?


Missing Signature

1. Would your institution leave the item paid or give the

customer his money back?

2. What entity warrants the signature on the front of a

check?

3. What law, rule or regulation would have applied if

someone at Quick Cash signed the check for John?


Counterfeit Check

Pro Apparel Company calls

Sunset Bank on May 15 claiming

a check that posted to their

account last night is out of their

check range and no one knows

what the purchase was for. They

are claiming this is a counterfeit


check. They call later in the day to say that the CEO’s

secretary confessed to purchasing check stock and

creating the counterfeit check using the CEO’s signature

stamp she uses for other checks. She needed to pay for her

car repairs and didn’t have the money. What action should

be taken?

Counterfeit Check

1. Should this check be returned or adjusted?

2. What return reason code or adjustment type code

should be used?

3. If the company had not called right away what would

your institution do?


Forged Signature

Mary comes into Public Bank on April 10

and explains she just noticed checks

missing out of her checkbook. The

customer service agent reviews Mary’s

account history with her to identify if any

checks have posted. Mary says that she

did not write check #105 for $630 to


Gloria Black that posted on April 5. The item is returned as

forgery back to the Bank of First Deposit (BOFD), and the

agent closes Mary’s account and opens a new one to avoid

any further issues. As the BOFD, what would you do with

this check when you receive it back?

Forged Signature

1. What action should the Bank of First Deposit make?

2. What timeframe would you have to do this action?

3. Are their any restrictions to taking this action?

4. What action can be taken if beyond the

appropriate timeframe?


Holder in Due Course

The Peoples Credit Union has a

member deposit a physical

paper check into their account.

Three days later the credit

union receives a duplicate item

adjustment entry to their

Federal Reserve account.

Research shows the item had


previously been deposited via mobile capture at another

financial institution. The Peoples Credit Union would like to

claim Holder in Due Course since they still have the paper

check. Could this be done?

Holder in Due Course

1. Would your institution file a Holder in Due Course

Claim?

2. Why or why not?

3. Would there be an alternative action that could be

taken?

4. What law addresses HIDC?


Remotely Created Check

An account holder calls his

bank stating that a check hit

his account last night for

$125.50 and doesn’t know

what this is for. The call

center employee pulls the

item up and notices this is a


remotely created check that posted from Premier

Magazines. The account holder says this is unauthorized.

What can be done?

Remotely Created Check

1. This item was caught within 24 hours, what return code

should be used?

2. If it would have been outside of 24 hours, what type of

adjustment could be done?

3. What is the timeframe for this type of adjustment?

4. Are their any documents required to go with this

type of adjustment?



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