National Check Payments Certification - ECCHO€¦ · · 2016-01-06• Depositary Bank (BOFD) is Holder In Due Course – Can make claim back to Drawer National Check Payments Certification

Regulations - Uniform Commercial Code 2013-2014

Copyright © 2013 by ECCHO (Certain contributed content subject to third party copyrights) 1

National Check Payments Certification

Regulations – Uniform Commercial Code

Copyright© 2013 by the Electronic Check Clearing House Organization

NCP 2014 ExamECCHO Training Series

Session 2

Feb 27, 20142:00 pm ET (1:00 pm CT; 11:00 am PT)

All sessions 90‐min.

NOTICES

This training course may provide an introduction to or summary of various aspects of checkpayments and the legal and rules framework for check image exchange. Responsibility forcompliance with image exchange rules, and/or the legal, operational and regulatoryrequirements applicable to check image exchange, remains at all times with the financialinstitution participating in check image exchange and/or the individual or company using acheck image exchange service.

This presentation and the information contained herein is not intended as legal or complianceadvice or recommendation to any person or company. This document could include technicalinaccuracies or typographical errors and individual users are responsible for verifying anyinformation found in this presentation and related “live” webinar or webinar playback.

Financial institutions should consult with their legal counsel regarding legal and operationalrequirements applicable to any check image exchange program they may offer or in which theyparticipate.

These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO.

Copyright© 2013 by the Electronic Check Clearing House Organization(Certain contributed content subject to third party copyrights)

2National Check Payments Certification



Session Overview

• Warranty and Indemnity in Payments• Uniform Commercial Code (UCC)

–Article 3 – Negotiable Instruments–Article 4 – Bank Deposits and Collections


Warranty and Indemnity in Payments

• Inter‐bank exchange of checks subject to state/federal law• Rules and agreements important in assigning liability

– Address exchange issues in uniform mannerRules may be applied to exchanges across multiple financial institutions and exchange networks

• Check Image Rules – Establish legal rights and obligations of financial institutions in exchanging check images– Address operational and technical requirements– Reduce risk to exchange participants

• Financial institutions exchanging check images without rules /agreements– Potentially expose both sending and receiving banks to increased payment /operational risks




Warranty and Indemnity in Payments

• Role of Uniform Commercial Code (UCC)– Model state laws as adopted by each stateExample: Transfer and presentment warranties

• Role of Regulation CC – Federal law implementing regulations for:– Expedited Funds Availability Act (“EFAA”)– Check Clearing for the 21st Century Act (“Check 21 Act”)Example: Substitute check warranties

• Clearinghouse Rules (ECCHO Rules)– Agreement covering clearinghouse members for images exchanged under uniform rulesExample: “Chain of warranties” and forged and counterfeit check warranty

• Federal Reserve Operating Circulars– Rules governing all exchanges to /from FRBExample: Defines liability of the FRB vs. presenting or returning bank


Indemnification Example

• Bank A warrants it will not ask Paying Bank to pay an item it has already paid(“no double debit” warranty)

• Bank A sends duplicate image resulting in breach of warranty

• Paying Bank is indemnified from loss– Can make a claim back to Bank A

– Bank A breached its warranty

Bank A

Paying Bank

Paying Bank’s

Customer

StatementIMAGE

DUPLICATE IMAGE

Breach of Warranty Claim




Overview of Check Regulations

• Uniform Commercial Code–Article 3: Negotiable Instruments–Article 4: Bank Deposits and Collections

• Regulation CC–Availability of Funds and Collection of Checks

• Regulation J–Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire


Uniform Commercial Code



UCC Article 3 Overview

• UCC 3 ‐ Negotiable Instruments• Establishes general duty standards for parties to:

– “Act in Good Faith”– “Exercise Ordinary Care”

• Covers– Definition and requirements of a negotiable instrument– Negotiation, transfer and endorsement of these instruments, and

– Liability of the parties• Sample topics:

– Standards of care required for processing checks– Establishing the identity of the payee– Negligence of maker in case of forgery or alteration– Forgery and fraud loss allocation– Employer’s responsibility for employee fraud


UCC Article 4 Overview

• UCC 4 – Bank Deposits and Collections• Covers check collection, payment, liabilities, time frames and responsibilities

• Any provision under Article 4 may be varied by agreement between bank and customer– Except bank’s duty to “Act in Good Faith” and “Exercise Ordinary Care”

• Sample topics: –When a bank may charge a customer’s account– Customer’s right to stop payment– Bank’s option not to pay stale‐dated items– Customer’s obligation to report unauthorized signatures




UCC 3: Negotiable Instrument

• Written order signed by the drawer• Unconditional promise or order to pay a fixed sum of money–Unconditional unless it states: An express condition to paymentPromise or order subject to or governed by another recordRights or obligations with respect to promise or order stated in another record

• Instrument is a:– Draft: if it is an “order”– Note: if it is a “promise”


UCC 3: Check Definition

• Instrument is a “draft” if it is an order–Check definition can be found in UCC [3‐104(f)]–Within negotiable instrument definition

• "Check" means a:– (i) Draft: Payable on demand and drawn on a bank; or

– (ii) Cashier's check or teller's checkMay be check even though described by another term, such as "money order"




UCC 3: Demand Instrument

• Payable on demand or at a definite time–On DemandPayable on demand or at sight, or otherwise indicates that it is payable at the will of the holderDoes not state any time of payment

– Payable at a Definite Time Payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time readily ascertainable at the time the order is issued

–Date of instrumentIf undated, the date is:

o Date of its issue or o Date it first comes into possession of a holder


UCC 3: Payable To

• Payable To options:–To a named payee; or–To bearer if it states that it:Is payable to the Order of bearer; orIndicates that the person in possession of order is entitled to payment; orDoes not state a payee; orIs payable to cash




UCC 3 – Date

• Day on or after which the transfer of the amount of the check may take place–Required for negotiability

• Post‐dated checks–Bank may charge a customer’s account even though payment is made before the date on the checkUnless the customer gives bank notice of the postdating

• Stale‐dated checks–Bank may, but is not obligated to, pay a check presented more than six months after its date


UCC 3 – Amount

• Value which will pass from the account of the Drawer to the Payee– Required for negotiability

• To inhibit unauthorized alteration, amount should appear twice on the check–Written in numbers: Courtesy amount or convenience amount

–Written in words: Legal amount• Contradictory Terms of Instrument (UCC3‐114)

– If instrument contains contradictory terms:Typewritten terms prevail over printed termsHandwritten terms prevail over bothWords prevail over numbers




UCC 3 – Payee

• Name of the person or organization that is to receive the amount of the check

• Usually preceded by the words: “Pay to the order of...” or “Pay to...” or “Pay...”–Required for negotiability

• Identity of the payee is determined by the intent of the Drawer

• Joint Payees ‐ Payable to two or more–Check payable to A or B ‐ Separated by “/” or “,”Either may indorse and negotiate

– Payable to A and BBoth must indorse and negotiate


UCC 3 – Identification of Payee

• Intention of the signer– Payable to the person intended by the signer even if that person is identified in the instrument by a name or other identification that is not that of the intended person

• Method of identification– May be identified in any way, including by name, identifying number, office, or account number

– If instrument is payable to an account identified by number and by the name of a person, the instrument is payable to the named person, whether or not that person is the owner of the account identified by number

• Trusts, estates or agents– If trust or estate, payable to the trustee, representative, whether or not the beneficiary or estate is also named




UCC 3 – Signature

• Authorizes the paying bank to disburse funds–Required for negotiability

• Must coincide with the conditions of payment on the signature card

• May contain restrictive notations for which bank may require an indemnity


UCC 3 – Unauthorized Signature

• Person is not liable on an instrument unless he or she signs it

• If person’s name is signed without authority, the signature is unauthorized




UCC 3 – Signature and Unauthorized Signature

• No particular form of signature required–Manually or by device or machine–Name including trade or assumed name–Mark or symbol with intent to authenticate

• Signature by a representative–Represented person is liable if instrument is signed by a representative

• Multiple signatures– If signature of more than one person is required to constitute the authorized signature of an organization, it is unauthorized if one of the required signatures is lacking


Negotiation

• Result of the transfer of possession of instrument–From Holder to another person or bank who becomes Holder as a result of the transfer


Depositary Bank

Deposits or Cashes Check

Exchanges check “for value”

$IndividualPayee

“Holder” of Check



Unindorsed Item

• Depositary Bank becomes a holder of the item at the time it receives the item for collection–If the customer was holder of the item, whether or not the customer indorses the item

–Depositary Bank warrants that amount of the item was paid to the customer or deposited to the customer's account


Holder vs. Holder in Due Course

• Holder in Due Course (HIDC) (UCC 3‐302)– Took the item in good Faith– Took item for value– Holder who has possession–Without notice signature unauthorized or item altered–Without knowledge of claims against it

• HIDC concept – Represents a “chain of ownership”– No other payment system has this

• Benefit of being the HIDC– Can enforce item against drawer even if item was returned unpaid by drawee (Paying Bank)




Paying Bank

Bank of First Deposit(BOFD)

SalesPerson / Payee / DepositorDrawer

(1)Goods

Purchased(1)

Check Deposited

Image

Image

Returned(3)

(2)Drawer issues Stop Pay order

(3)Chargeback Attempt;

Payee Closed Account

(4)BOFD /HIDC

Claim

(2)Goods found

to be fraudulent

Holder In Due Course

• Depositary Bank (BOFD) is Holder In Due Course– Can make claim back to Drawer

National Check Payments Certification 25

Holder in Due Course (HIDC)

• Financial intermediary, such as Depositary Bank (BOFD) or Collecting Bank–Should not be affected by disputes between the Drawer and Payee of check regarding the underlying transaction

–Can make HIDC claim back to Drawer




UCC 3 – Indorsement

• Signature either alone or accompanied by other words–For purpose of:Negotiating the instrumentRestricting payment of instrumentIncurring indorser’s liability on instrument

–Transfers ownership to another partyPayee indorses check to deposit, cash or transfer ownership of the instrument

• Payee Indorsement–Need not be exact–May be “substantially similar” as clarified in 1991 revision to UCC (3‐404)


UCC 3 – Payee Indorsements

• Blank– Payee simply signs his/her name– Check becomes a bearer instrument and can be transferred to anyone simply by giving the check to another party

• Special– Transfers the check to a specified payee– Negotiation then requires that person’s subsequent indorsement

• Restrictive– Imposes limitations on transferring the check

• Anomalous– Indorsement made by person who is not holder of the instrument




UCC 3 – Incomplete Instruments

• At time of signing it is incomplete but that signer intended it to be completed by the addition of words or numbers–Must meet the requirements of a negotiable instrument

• Incomplete Instrument and Alteration–Words or numbers added to incomplete instrument without authority of signer is an alteration (UCC 3‐407)


UCC 3 – Employer’s Responsibility

• Employee of the company or a person acting in concert with the employee (e.g.; an independent contractor) makes a fraudulent indorsement–Checks written, stamped or deposited fraudulently using the company’s account

–Employer is liable and not the Paying Bank




Forged Drawer’s Signature

• Price v. Neal–Case decided in English court in 1762Decision essentially was that a Paying bank is in best position to detect a forged drawer’s signature

o Should bear the loss arising from its payment of a check containing a forged drawer’s signature

Decision commonly known as the “Rule of Price v. Neal”

o Embodied in the UCC 3‐417(a) and 4‐208(a).


UCC 4 – When Bank May Charge Account

• Bank May Charge Customers Account–Even though the charge creates an overdraftCustomer is not liable for overdraft if they didn’t sign or benefit from the proceeds of the item

–Even though payment was made before the date of the checkUnless customer has given notice to bank of the postdating describing the check with reasonable certainty

• Bank is not obligated to pay a check more than six months old–But it may charge its customer's account for a payment made thereafter in good faith




UCC 4 ‐ Customers Duty to Report

• Customers Duty to Discover and Report Unauthorized Signature or Alteration (UCC 4‐406)– Bank sends or makes available a statement showing payment of items

– Return or make available the items paid or provide information in the statement of account sufficient to allow the customer reasonably to identify the items paidFurnish legible copies of items for seven years if requested

– Customer must exercise reasonable promptness in examining the statement and must promptly notify the bank of the relevant factsReport an unauthorized signature to the bank within one year from the date that the statement was made available

– Bank Deposit agreement can vary this timing


UCC Transfer Warranties (4‐207)

• Person or collecting bank transferring item warrants:–Entitled to enforce the item–All signatures on the item are authentic and authorized;

– Item has not been altered;– Item is not subject to a defense or claim–Warrantor has no knowledge of any insolvency proceeding with respect to the maker

–For RCC the person on whose account the item is drawn authorized item and amount for which the item is drawn




BOFDPaying Bank

Agreement

Company

Statement

Transfer & Presentment Warranties

• Warranty travels with the Image– Chain of warranties

• Transfer warranty from BOFD to Collecting Bank• Presentment warranty from Presenting Bank to Paying Bank

IMAGE

RDC Customer

IMAGE

Intermediary / Collecting Bank / Presenting Bank

IMAGE

Note: All banks members of same clearing house


UCC Presentment Warranties (4‐208)

• Person presenting item warrants: –Entitled to enforce draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;

–Item has not been altered; and –Warrantor has no knowledge that signature of the purported drawer of the draft is unauthorized; and

–For RCC, person on whose account the item is drawn authorized item and amount for which it is drawn




Statute of Limitations

• Designed to prevent fraudulent / stale claims from arising after all evidence lost or after facts have become obscure through passage of time–Defense ordinarily asserted by defendant to defeat an action brought after appropriate time has elapsed

–Enacted by the legislature, which may either extend or reduce time limits, subject to certain restrictions

• Statute of Limitations:–Under UCC = 3 years


Questions




Quiz Questions

• Available online with session handouts• Review each question carefully

–Answer based on what’s been presented–Use additional recommended resources as neededP.R.E.P. GuideQuestion of the DayOther online exam resources

–Answer Key included–Will review at start of next session

• Save weekly Quiz Handouts–Review Questions and answers–Will reference in Series Review sessions


Recommended Resources

• Uniform Commercial Code (UCC)–Article 3 – Negotiable Instruments–Article 4 – Bank Deposits and Collections

• ECCHO website: www.eccho.org

• Federal Reserve website: www.frbservices.org




Next Session

• Session #3: March 5– 2:00 pm ET (1:00 pm CT / 11:00 am PT)–All sessions – 90‐minutes

• Topic: “Regulations – Regulation CC”–Will discuss:Warranty and Indemnity in PaymentsRegulation CC including:

o Availability and Disclosure Requirementso Collection and Return Requirementso Check 21 and Substitute Check


Thank You!

Regulations – Uniform Commercial Code

Electronic Check Clearing House Organization3710 Rawlins Street; Suite 1075

Dallas, Texas 75219

NOTICEThis NCPC Program document contains copyrighted materials of its publisher.

These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO.

Ellen Heffner, NCPDirector and Education Manager [email protected]‐273‐3211

Phyllis Meyerson, AAP, CCMExecutive Vice President

pmeyerson@ eccho.org214‐273‐3202

Documents

National Check Payments Certification - ECCHO€¦ · · 2016-01-06• Depositary Bank (BOFD) is Holder In Due Course – Can make claim back to Drawer National Check Payments Certification