2. Learning Objectives
1. Clarify the bank’s duties in the bank–depositor
relationship.
2. Clarify the depositor’s duties in the bank–depositor
relationship.
3. Explain a drawer’s rights in relation to a stop-payment
order.
4. Explain the extent of the insurance protection provided
by the FDIC.
5. List the different terms used to describe banks during
the bank collection process.
3. Learning Objectives (cont.)
6. Outline a check’s life cycle.
7. Describe the principal features of the Check 21 Act.
8. Describe the consumer protection features of the
Check 21 Act.
9. Describe the process of an electronic fund transfer.
10. Discuss the protection given to consumers by the
Electronic Fund Transfer Act.
4. The Bank–Depositor Relationship
• The relationship between the drawee bank and
its customer is that of both:
– Debtor and creditor
• Customer deposits money at bank, customer is creditor,
bank is debtor
– Agent and principal
• Bank (agent) attempts to collect negotiable instruments
made payable to the customer (principal)
• Provisional settlement – may be revoked by bank if
instrument is dishonored (bank will try to get their money
back from you)
5. The Bank’s Duties
• The drawee bank is under a duty to:
– Honor orders
– Protect funds
• Certain limitations apply
6. The Bank’s Duties – Duty to Honor Orders
• Duty to honor all checks drawn by customers,
provided sufficient funds exist
– If insufficient funds, bank may create an overdraft,
reversing creditor/debtor relationship
– If bank dishonors check by its own mistake, bank
liable to customer for actual damages
– Drawee bank not liable to holder of check, unless it is
certified
– Holder’s recourse would be against drawer or
indorsers
7. The Bank’s Duties – Duty to Honor Orders
• Stale check
– Check presented for payment more than six
months after its date.
– Bank is under no obligation to a customer to
pay a stale check unless it is certified.
– Bank may honor a stale check without liability
to its customer if it acts in good faith
8. The Bank’s Duties – Death or Incompetence
• The drawee bank is not liable for the payment of
a check before it has notice of the death or
incompetence of the drawer.
• Bank may pay or certify checks for 10 days after
the drawer’s death
– Allows holders of checks drawn shortly before
drawer’s death to cash them without filing a claim
against drawer’s estate
9. The Bank’s Duties – Forged and Altered Checks
• Forgery
– Fraudulent making or alteration of a writing
• Uttering
– Knowingly offering a forged instrument to
another person
10. The Bank’s Duties – Forged and Altered Checks
• If bank (in good faith) pays the altered amount on
a check to a holder, bank may only deduct the
original amount from drawer’s account
• If bank pays on an instrument where signature
has been forged, bank liable to depositor
11. The Bank’s Duties - Availability of Funds
• Competitive Banking Act
– the Federal Reserve Board of Governors issued
Regulation CC, which requires banks to make
funds available to depositors according to a
prescribed schedule
12. Availability of Funds
• Business day
– defined under Regulation CC as Monday
through Friday, except for most federal
holidays.
• Banking day
– any business day (up to the bank’s cut-off
hour) when the bank is open for substantially
all of its banking activities.
14. Midnight Deadline
• If payor bank is not depositary bank
– must settle for an item by midnight of the banking
day of receipt
• If payor bank is also depositary bank
– must pay or return check by midnight of the next
banking day after it receives the item
15. The Depositor’s Duties
• Have sufficient funds on deposit to
cover checks that they write.
• Examine statements and canceled
checks promptly and with reasonable
care.
• Notify bank quickly of discrepancies
16. Bad Checks
• The payee has the obligation of informing
the drawer of the nonpayment of the check,
together with:
– notice of the provisions of the bad-check law
– the party’s legal rights and obligations
17. Bad Checks
• After receiving notice of nonpayment or
dishonor
– The drawer is given a specified number of days,
usually 5 or 10
– in which to make the check good without fear
of prosecution
18. North Carolina Worthless Check Law
Worthless check
≤ $2,000 = misdemeanor
> $2,000 = felony
Bank will send bad check back to merchant with NSF stamp
Checks not eligible:
Loans or Extensions of Credit
Two Party Checks
Pre- or Post-dated Checks
Lost or Stolen Checks
Stop Payments
Checks over two years old
Merchant must send certified letter to drawer
No response after 15 days – notify local District Attorney’s Office
(online application available)
District Attorney sends another certified letter
No response after 30 days – criminal warrant issued
Treble damages are possible (in addition to $25 bad check fee, min $100 max $500)
Gaston & Lincoln counties do not
currently participate in the state-allowed
Worthless Check Forgiveness Program
19. Duty to Examine Accounts
• Depositors have duty to examine their bank
statements and canceled checks promptly and
with reasonable care
• Notify bank of forged or altered instruments
– If a forged or altered check, within one year
– If a forged indorsement, within three years
– If the same wrongdoer had forged multiple checks,
within 30 days of receipt of statement
20. Antedated and Postdated Checks
• Antedated check
– written and dated on one day and delivered at a later
time
• Postdated check
– the drawer delivers it before its stated date
• A bank may charge a postdated check against a
customer’s account unless the customer has
notified the bank of the check within a
reasonable time for the bank to act on it.
21. Stop Payment Rights
• Drawers may stop payment on any item payable
on their account
– have to give bank reasonable time to act on it
• If the bank fails to stop payment, bank is liable for
losses, but burden of proof is on customer
• Oral order – valid for 14 days, unless renewed in
writing
• Written order – valid for 6 months, unless
renewed in writing
22. Stop Payment Rights
• Subrogation
– The bank may take the place of any holder,
holder in due course, payee, or drawer who
has rights against others on the underlying
obligation.
23. Insured Accounts
• The Federal Deposit Insurance Corporation (FDIC)
insures deposits in banks as well as in savings and
loan associations.
• The basic insurance coverage protects individual
bank accounts for up to $100,000* and joint
accounts for up to an additional $100,000*
• *This has been changed to $250,000
• Insured Accounts
24. Bank Descriptions
• Depositary bank
– the first bank to which an item is transferred for
collection
• Payor bank
– a bank by which an item is payable as drawn or
accepted
• Intermediary bank
– any bank to which an item is transferred in the course
of collection, except the depositary or payor bank
25. Bank Descriptions
• Collecting bank
– any bank handling the item for collection, except the
payor bank
• Presenting bank
– any bank presenting an item, except a payor bank
• Remitting bank
– any payor or intermediary bank remitting for an item
– Remit = send payment
26.
27. Cyber-Banking
• Using computers and electronic technology as a
substitute for checks and other banking methods.
– Check 21 Act
– Electronic Fund Transfer Act
28. Check 21 Act
• Brings the check-clearing method into the
modern age by the use of electronic check
processing.
• Changed requirement that original checks
be presented to the drawee bank for
payment
• Substitute check is used
29. Check 21 Act
• Substitute check
– paper reproduction of both sides of an original check
that can be processed just like the original check
– also called an image replacement document or IRD
• Original checks no longer returned
– Customer may request paper reproduction of original
check, this is often provided online
31. Consumer Protection
This right to expedited credit exists if the
consumer asserts in good faith the following
four facts:
32. Consumer Protection
1. The bank charged the consumer’s account for a
substitute check that was given to the
consumer.
2. Either the check was not properly charged to
the consumer’s account, or the consumer has a
warranty claim with respect to the substitute
check.
3. The consumer suffered a resulting loss.
4. The production of the original check or a better
copy of the original check is necessary to
determine the validity of any claim.
33. Consumer Protection
•
The bank must investigate if a consumer makes
a claim within 45 days of receiving the bank
statement or substitute check
•
If it needs more than 10 days to investigate,
must credit the account up to $2,500
•
The balance above $2,500 must be credited
within 45 days after the claim
34. Electronic Banking
• Online debit cards (run as debit, PIN-based)
– make an immediate transfer of money from the customer’s
bank account to the merchant’s bank account.
• Offline debit cards (run as credit, signature based)
– record a debit against the customer’s bank account, which is
processed later.
•
•
http://www.consumerismcommentary.com/visas-take-on-debit-cards/
http://www.wisebread.com/debit-or-credit-which-one-should-you-choose-atthe-checkout
35. The Electronic Funds Transfer Act
• A consumer protection act covering EFTs
– Does not apply to transactions between banks and
other businesses
• Entitles consumers to receive a written receipt
when they use an ATM
• Requires the transaction to appear on the
periodic statement
• Allows consumers 60 days to notify bank of
errors and requires bank to investigate
36. Question?
A stale check is one that is presented for payment
more than ________ after its date.
A. One year
B. Five years
C. Six months
D. Ten weeks
37. Question?
What is the offering of a forged instrument to
another person when the offeror knows it to be
forged?
A. Forgery
B. Uttering
C. Fraud
D. Swindle
38. Question?
What type of check is written and dated on one day
and delivered at a later time?
A. Post-dated
B. Antecedent
C. Pre-dated
D. Antedated
39. Question?
Which debit card make an immediate transfer of
money from the customer’s bank account to
the merchant’s bank account?
A. Online
B. Offline
C. Wired
D. deadline
40. Question?
Which bank is a bank by which an item is payable as
drawn or accepted?
A. Depositary bank
B. Payor bank
C. Intermediary bank
D. Remitting bank
41. Question?
A _________ check is a paper reproduction of both
sides of an original check that can be processed
just like the original check.
A. Stale
B. Substitute
C. Surrogate
D. Proxy
Editor's Notes
The bank acts as the customer’s agent when it collects or attempts to collect checks or other negotiable instruments made payable to the customer. If the items are deposited in the customer’s account, any settlement made by the bank with the customer is provisional. A provisional settlement may be revoked by the bank if an item that the bank is attempting to collect is dishonored. The bank may charge back the amount of any credit given for the item to its customer’s account or obtain a refund from its customer.
If there are insufficient funds on deposit, the bank may charge the customer’s account even if it creates an overdraft. If a bank fails to honor a check because of a mistake on its part, the bank is liable to the customer for any actual damages the customer suffers. The drawee bank has no liability to the holder of the check, however, unless it is certified.
A bank is under no obligation to a customer to pay a stale check unless it is certified. The drawee bank is not liable to a holder of a check for dishonoring the instrument unless it is certified. The holder’s recourse is against the drawer or indorsers on their secondary liability.
In any event, a bank may pay or certify checks for 10 days after the date of death of the drawer. This rule permits holders of checks that are drawn shortly before the drawer’s death to cash them without the necessity of filing a claim with the court handling the deceased’s estate.
A forgery is committed when a person fraudulently writes or alters a check or other form of negotiable instrument to the injury of another. The commission of forgery is a crime, subject to a fine and imprisonment. If a bank, in good faith, pays the altered amount of a check to a holder, it may deduct from the drawer’s account only the amount of the check as it was originally written.
With exceptions, funds from checks drawn on the U.S. Treasury or any state or local government and any bank draft, cashier’s check, or postal money order must be made available on the next business day following the banking day of deposit; funds from checks drawn on banks within the same Federal Reserve district must be made available within two business days following the banking day of deposit; and funds from checks drawn on banks outside the bank’s Federal Reserve district must be made available within five business days following the banking day of deposit.
Getting Students Involved
The Federal Reserve Bank, under Alan Greenspan, was very active in trying to regulate the economy to protect against inflation. Have students research the Federal Reserve’s actions during the past 20 years and then have them debate whether they think the Federal Reserve’s monetary policies have helped or hurt the national economy.
Payor banks are required to either settle or return checks quickly. If they do not do so, they are responsible for paying them. If the payor bank is not the depositary bank, it must settle for an item by midnight of the banking day of receipt.
Depositors, in general, owe a duty to the banks in which they have checking accounts to have sufficient funds on deposit to cover checks that they write. They must also examine their bank statements and canceled checks promptly and with reasonable care and notify the bank quickly of any discrepancies.
Most states have statutes making it larceny or attempted larceny for a person to issue a check drawn on a bank in which the person has insufficient funds. Such statutes usually have the following provisions that must be observed in the prosecution of anyone issuing a bad check, sometimes called an NSF check; The payee has the obligation of informing the drawer of the nonpayment of the check, together with notice of the provisions of the bad-check law and of the party’s legal rights and obligations. After receiving notice of nonpayment, or dishonor, the drawer is given a specified number of days, usually five or ten, in which to make the check good, without fear of prosecution. Failure to make full payment of the check within the number of days allowed by statute serves as presumption of guilt that the drawer issued the check with full knowledge of the facts and with intent to defraud.
Teaching Tips To facilitate class discussion, obtain copies of your state’s criminal code that applies to writing bad checks and distribute the copies to students. Invite a prosecuting attorney to discuss policies of his or her office with respect to bad checks and explain what fines, restitution, and jail penalties are possible for those charged with passing bad checks.
The exact time within which a depositor must notify a bank is not established except in the case of the same wrongdoer forging or altering more than one check. In that case, the bank must be notified of the wrongdoing within 30 days after the depositor receives the bank statement.
A bank may charge a postdated check against a customer’s account unless the customer has notified the bank of the postdated check within a reasonable time for the bank to act on it. Any such notice by a customer to a bank is effective for the same time periods allowed for stop-payment orders, discussed subsequently. If a check is undated, its date is the date that it was first given to someone.
If a bank fails to stop payment on a check, it is responsible for any loss suffered by the drawer who ordered the payment stopped.
The bank, may take the place of any holder, holder in due course, payee, or drawer who has rights against others on the underlying obligation. This right to be substituted for another is known as the bank’s right of subrogation. It is designed to prevent loss to the bank and unjust enrichment to other parties.
During the bank collection process, banks are described by different terms, depending on their particular function in a transaction. Sometimes a bank takes a check for deposit. At other times, it pays a check as a drawee. At still other times, it takes a check for collection only.
During the bank collection process, banks are described by different terms, depending on their particular function in a transaction. Sometimes a bank takes a check for deposit. At other times, it pays a check as a drawee. At still other times, it takes a check for collection only.
People can go to automatic teller machines (ATMs) 24 hours a day to make bank deposits and withdrawals. They can pay bills by phone, have deposits made directly to their bank accounts, and pay for retail purchases directly from their bank accounts. Some banks have arrangements for payment by e-check (sometimes called electronic check conversion), which is a system in which funds are electronically transferred from a customer’s checking account, eliminating the need to process a paper check.
Under the new law, banks are not required to use substitute checks, but when they do so for consideration, they make the following warranties:
• The substitute check contains an accurate image of the front and back of the original check.
• It is the legal equivalent of the original check.
• No drawer, drawee, indorser, or depositary bank will be asked to pay a check that it already has paid.
Teaching Tips Have students bring in several of their own canceled checks. Select a few of them to diagram on the board the various institutions through which the checks have been. Then have the students discuss what steps in the cycle are common to all checks and what steps are not as common.
If the consumer makes a claim within 45 days after receiving the bank statement or substitute
check, the bank must investigate it and make any necessary recredit to the consumer’s
account. If the bank needs more than 10 days to investigate and resolve the complaint, it must
recredit the consumer’s account for an amount up to $2,500 while it completes its investigation.
The bank must recredit any remaining balance greater than $2,500 no later than 45 days
after the consumer submits the claim.
To protect consumers from losses related to substitute checks,
the Check 21 Act includes a consumer’s right to claim an expedited credit
If the consumer makes a claim within 45 days after receiving the bank statement or substitute check, the bank must investigate it and make any necessary recredit to the consumer’s account. If the bank needs more than 10 days to investigate and resolve the complaint, it must recredit the consumer’s account for an amount up to $2,500 while it completes its investigation. The bank must recredit any remaining balance greater than $2,500 no later than 45 days after the consumer submits the claim.
A debit card offers less protection than a credit card. Unlike a credit card, a debit card payment cannot be stopped if a purchase is defective or an order is not delivered. In addition, your liability for the unauthorized use of your ATM or debit card is limited to $50 only if you notify the issuer within two business days of the loss or theft of the card. Your liability increases to $500 if notice is delayed beyond that time, and it becomes unlimited when notice is not given within 60 days. The unauthorized use of an ATM card is a criminal offense punishable by a $10,000 fine and/or 10 years in prison.
The correct answer is “C” – six months. See next slide.
The correct answer is “B” – uttering. See next slide.
The correct answer is “D” – antedated. See next slide.
The correct answer is “A” – online. See next slide.
The correct answer is “B” – payor bank. See next slide.
The correct answer is “B” – substitute. See next slide.
