What are the two Rules & Regulations that govern check returns?
UCC 4-301 & Reg CC 229.30
What is the check return deadline according to UCC & what section?
UCC 4-301 requires the paying bank to make the determination to pay or dishonor the item by midnight of the next banking day following the banking day on which the item was presented
What is the check return deadline according to Reg CC & what section?
Reg. CC 229.30 requires items to be returned, to be handled expeditiously
* Return must be received by the depositary bank not later than 2:00 p.m. (local time) on the second business day following the banking day on which the check was presented to the paying bank
Returns vs. Adjustment Considerations: Not sure cause of error?
RUTURN IS FASTER:
-Timely settlement
-Don’t lose right of return (if you can make the deadline for timely return)
-RDC, speed is a consideration if unsure of cause of duplicate
NEGATIVE CUSTOMER IMPACTS:
-Depositing customer and/or drawer customer
Returns vs. Adjustment Considerations: System Error?
Adjustment to bank is made to appropriate party
* Minimizes negative impact to customers
* Handled within banking system
* Adjustment areas familiar with process
CAN BE LESS EFFICIENT than return
* Research and settlement timing
* Additional documentation may be needed
MAY LOSE RIGHT TO RETURN (If missed deadlines for timely return)
* Significant issue if item is counterfeit or forged and not duplicate
Pay/No Pay Decision: When item is presented for payment, paying bank should verify:
- Status of the account
– Is it ours? Is the account closed/frozen? - Status of funds
– Sufficient balance, OD protection? - Authority to pay the check
– Meets conditions of signature card?
– Stop payment requests - Legitimacy of the check
– Negotiability, proper indorsement
How to return (return hierarchy) in both FED & Private Sector:
- Return items may be directed back to BOFD or prior collection or presenting bank [26 Record].
- If it isn’t there, then you go to the back of the image [28 Record].
- Then to the collecting bank if the 28 record isn’t there.
- Then to the source of receipt if that isn’t there (which is what the rules say in Reg CC). i.e. – the Fed (fee charged).
What are the Reg CC Return Item Warranties?
When returning a check (or in providing notice in lieu of a return), the paying bank (and any other returning bank) warrants to the depositary bank that:
* The check was returned within the deadline (Returning banks [other than paying bank] are providing warranty that the paying bank met its midnight deadline
* It is authorized to return the check
* The returned check has not been materially altered
* The original check (in the case of notice in lieu of return) has not and
will not be returned
Define Notice of Nonpayment:
Paying bank determines not to pay a check $5,000 or more
* Shall provide notice of nonpayment to depositary bank by 2:00 p.m. (local time) on second business day following the banking day on which check was presented
* Notice may be provided by any reasonable means
* Electronic returned check can suffice as notice
How is the paying bank to notate/identify a returned check?
- A paying bank returning a check shall clearly indicate on the front of the check that it is a returned check and the reason for return
- If the check is a substitute check, the paying bank shall place this information within the image of the original check that appears on the front of the substitute check
How is the Depositary Bank to accept returned checks?
- A depositary bank shall accept returned checks and written notices of nonpayment (At a location at which presentment of checks for forward collection is requested
by the depositary bank; AND (At a branch, head office, or other location consistent with the name and address of the bank in its indorsement on the check) - A depositary bank may require that returned checks be separated from forward collection checks
How is the Depositary Bank to pay a returned check?
A depositary bank shall pay the returning or paying bank returning the check to it for the amount of the check prior to the close of business on the banking day on which it received the check (i.e., payment date) by:
* Debit to an account of the depositary bank on the books of the returning or paying bank;
* Cash;
* Wire transfer; or
* Any other form of payment acceptable to the returning or paying bank;
Payments are final when made
How many times may a depositary bank represent a return check and what are the main return reasons that you can represent for?
NSF or uncollected funds
* Fed: One representment
* ECCHO: Two representments
What are the customer notice requirements for a depositary bank for a return check?
If the depositary bank charges the item back to its customer, it is required to provide a notice of nonpayment by midnight of the banking day following the banking day on which it received the returned check or notice, or within a longer reasonable time
How can a Depositary Bank process a late return.
There isn’t a ‘LATE RETURN’ – it is handled as an ADJUSTMENT:
If paying bank fails to return the item in an expeditious manner (i.e., late return), the depositary bank may initiate a late return adjustment within two calendar Months (Fed) or 60 calendar
days (ECCHO)
What are the two types of Returns?
Customer Returns = R
Administrative Returns = E
Explain a R-Customer Check Return
Customer Return
* Dishonored item under check law
* Usually attempt charge to customer account
Explain an E-Administrative Check Return:
- Return for reason other than dishonored item
- Usually handled internally rather than charged to customer
- Can also be handled through adjustment process [this is how the fed will handle]
- If handled as return, must still adhere to legal requirements for return item
- Generally, administrative reasons for return are exchanged by
agreement
Explain Stop Payment Return (C):
A request, by a person having authority to sign on the account, not to pay a specific check that was written against that account
May be requested by any authorized signer; it need not be
* The signer of the check in question
* An account owner
What are the Stop Payment Timeframes?
UCC 4-403(a): Stop payment order must be received by the bank in a time and manner as to allow the bank a reasonable opportunity to act on the request
* A stop payment order is effective for six months (Lapses after 14 calendar days if the original order was oral and was not confirmed in a record within that period)
* May be renewed in writing for an additional six months
Stopping payment does not affect the drawer’s liability on the
check
Explain Post Dated (H) & Stale Dated (G) check and where defined?
ULTIMATELY – DATES DON’T MATTER
- UCC 4-401 (Post Dated): A bank may charge against the account of a customer a check that is otherwise properly payable from the account, even though payment was made
before the date of the check [TO ALLOW FOR THIS, STOP NEEDS TO BE REQUESTED TO EXPIRE ON DATE DATED FOR] - UCC 4-403 (Stale Dated): A bank is under no obligation to a customer to pay a check which is presented more than six months after its date, but it may charge its customer’s account for a payment made thereafter in good faith
Explain the check return reason Indorsement Irregular (J) and return deadline:
Usually used for issues with payee indorsement:
* Forged Indorsement:
– Indorsed, cashed or deposited by someone other than payee
– Check may even lack a physical indorsement
* Payable to multiple parties
– One party forges indorsements of all payees or negotiates without additional indorsements (Only “and” or “&” means both); (Otherwise: either, or)
* If discovered after return deadline, but within three years, must deal direct and affidavit is required
Explain check return reason Signature Irregular/Suspected Forgery (L) and return deadline:
Used if signatures do not conform to signature cards, or suspected forgery and customer affidavit not available. Forged signatures:
* False imitation of payee signature
– Generally perpetrated by person known to payee (Employees gone bad; Relatives)
– Check orders stolen from mailbox
* If discovered after return deadline, must deal direct and affidavit is required
– UCC 4-406: One-year statute of limitation for customer to assert claim for unauthorized signature. [ACCT AGREEMENT MAY SAY LESS, customer can still assert the claim, but they would be liable]
Explain the check return reason Altered/Fictitious/Counterfeit (N) and return deadline:
Multipurpose use:
* Altered
* Fictitious item
* Suspected counterfeit
* Counterfeit
If discovered after return deadline, must deal direct and affidavit is required
* UCC 4-406: One-year statute of limitation for customer to assert claim for alteration [ACCT AGREEMENTS CAN LESSEN TIMEFRAME customer can still assert the claim, but they would be liable]
Not used for Rule 9 claims
