Payment Systems Checklist
Spring 2003
1)Checking System
a)Banks Obligation to the Customer UCC § 4-401
i)Mandatory Payment of Check
(1)Properly payable
(a)Authorized by the customer and in accordance with agreement UCC § 4-401
(b)Authorized means signed by the customer on the account UCC § 4-401
(c)Agreement can vary Art. 4 but bank cannot contract away its duties of good faith and ordinary care. Parties can determine their own standards of ordinary care UCC § 4-103
(2)Sufficient Funds
(a)Bank needs to check for sufficient funds only once UCC § 4-402
(b)If bank checks again, that determination controls UCC § 4-402
(3)No valid stop payment order UCC § 4-403
(4)If bank does not pay, bank wrongfully dishonored the check UCC § 4-402
ii)Discretionary Payment of Check UCC § 4-401
(1)Properly payable even if it creates an overdraft
(2)Post-dated checks without notice from customer of delaying payment if the bank acts in good faithUCC § 4-401
(a)Honesty in fact and
(b)Observance of reasonable commercial standards of fair dealing UCC § 4-104
iii)Prohibited Payment of Check
(1)When not properly payable (forgeries) UCC § 4-401
(2)Valid stop payment order UCC § 4-403
(a)Any customer on the account notifies the bank to stop payment
(b)Written or oral notice
(i)Written = 6 month effectiveness
(ii)Oral = 2 weeks effectiveness
(c)Describing the check with reasonable certainty
(d)Given within a reasonable time so the bank can act
(e)Can be renewed
(f)Once expired, bank can pay if it pays in good faith
iv)Wrongful Honor UCC § 4-407
(1)Bank wrongfully pays an item it should not have
(2)General Rule: Bank is required to recredit the customer's account
(3)Exception: If unjust enrichment results, bank is subrogated to the rights of the party unjustly enriched
(4)Effect: Bank need not recredit customer
b)Funds Availability
i)General Rules
(1)UCC Rule: Bank need not make funds available until bank receives payment (settles) UCC § 4-215
(2)Exception: Expedited Funds Availability Act and Regulation CC
(3)Definitions Reg. CC § 229
(a)Business Days: weekdays not including holidays
(b)Banking day: business days that bank conducts banking business
ii)Basic Funds Availability Rules
(1)There is no rule allowing for same day availability of funds
(2)Noncash withdraw from local check
(a)Day 1: $100; Day 2: Balance
(3)Noncash withdraw from nonlocal check
(a)Day 1: $100; Day 5: Balance
(4)Cash Withdraw from local check
(a)Day 1: $100; Day 2: $400; Day 3: Balance
(5)Cash Withdraw from Nonlocal Check
(a)Day 1: $100; Day 5: $400; Day 6: Balance
iii)Next-Day Availability: No Risk Items Reg. CC § 229
(1)In-person cash deposit directly to teller in your own account
(2)Deposit of US government check (Treasury Check) in your name
(3)Deposit of state or local government check in your name from the same state as bank
(4)In-person deposit of cashier's, certified, or tellers' check in your name and in your account
(5)Deposit of "on-us" item
(6)$100 of the aggregate amount of all checks (not counting next-day availability checks) in any one banking day
iv)Second-Day Availability: Slightly Higher Risk Items Reg. CC § 229
(1)Local checks
(2)Local third party cashier's check
(3)U.S. Treasury check and state/local government checks signed over to 3rd person
(4)ATM deposits at ATM owned or controlled by depositary bank
v)Five-Day Availability: High Risk Items Reg. CC § 229
(1)Funds from a deposit of a nonlocal check must be made available on the fifth business day following the banking day of the deposit
(2)Nonlocal third party cashier's check
(3)ATM deposits at ATM not owned or controlled by depositary bank
vi)Exceptions: Extension of Availability Schedule for Highly Risky Items Reg. CC § 229
(1)New Account Deposits (open for 30 days or less)
(2)Amounts over $5000 (UCC § 4-215 applies for amounts over $5000)
(3)Redeposited Checks
(4)Deposits into "repeatedly overdrawn" account
(5)Deposits where there is "reasonable cause to doubt collectibility" (case-by-case determination)
c)Check Collection System
i)Definitions UCC 4-105
(1)Payor Bank: bank that is the drawee of a draft
(2)Depositary Bank: where check is deposited—can be payor bank as well
(3)Collecting Bank: Any bank that handles an item for collection except the payor bank.
(4)Intermediary Bank: transferring bank except the depository and payor bank
(5)Presenting Bank: any bank presenting an item except a payor bank
(6)Midnight deadline: midnight of the next banking day after a bank receives the check UCC § 4-104
(7)End of Banking Day: 2 p.m. or later so the bank can (1) process (2) prove balances and (3) make entries. If deposited after cutoff, treated as deposited the next banking day. UCC 4-108
(8)Branches: Each branch of a bank is separate bank for deadline purposes UCC 4-107
ii)Forward Collection
(1)Depositary bank receives item and gives provisional credit for the deposit by midnight of the banking day it receives the item (unless it's an "on-us" item)
(2)Collecting banks must use "ordinary care" in collecting the item UCC § 4-202
(a)Collecting banks are "agents" of the customer during the collection process
(b)Agency relationship terminates when the item is finally paid—then, depositary bank becomes debtor of the customer (because it owes the customer the amount of the check)
(3)"Ordinary care" means forwarding the check for collection before its midnight deadlineUCC § 4-202
(4)If the check is dishonored, depositary bank can revoke settlement, chargeback the amount of the item, or obtain a refund from the customer UCC § 4-214
(a)Must return the item by its midnight deadline or a reasonable time after it learns of the facts or
(b)Notifies the customer of the facts if the item cannot be returned
(c)If the depositary bank is the payor bank also, it must meet its midnight deadline
(5)Liability for Depositary Bank's Failure to Meet Requirements
(a)Loses ability to revoke settlement
(b)Loses chargeback right
iii)Return
(1)Payor bank must settle by midnight of the banking day it receives the item for payment
(2)"Settle" means to give provisional credit or pay
(3)Final Payment: UCC § 4-215
(a)Payor bank pays item in cash or
(b)Fails to revoke settlement before its midnight deadline
(4)Dishonor
(a)Payor bank has ability to dishonor an item if
(i)It is a demand item
(ii)Not presented for immediate payment
(iii)Returned before midnight deadline and before final payment
(b)Payor Bank must "send" dishonored check before its midnight deadline UCC § 1-201; § 4-104
(c)Bank must comply with expeditious return requirements Reg. CC § 229
(i)2-day test for local checks
(ii)4-day test for nonlocal checks
(iii)forward collection test: send the check the same way it was presented
(d)Bank must give notice of dishonor for return of checks exceeding $2500
(5)Liability for Payor Bank's Failure to Meet Requirements
(a)Payor bank is "accountable" for the amount of the item if it does not meet the return process requirements UCC § 4-302
(b)Payor bank loses ability to revoke settlement
(c)Payor Bank breaches warranty of expeditious return Reg. CC § 229
iv)Encoding Warranties UCC § 4-209; Reg CC § 229
(1)Person who encodes information on an item warrants to (1) subsequent collecting banks and (2) payor bank that encoded information is correct
(2)If customer of bank is the encoder, than the customer's bank also makes the warranty
(3)If information is incorrect, encoder is liable to the payor bank
(4)NOTE: Reg CC only applies to banks and warrants that the MICR line is correct
d)General Risk of Loss Rules (Banks Usually Bear Risk)
i)Nonpayment
(1)Risk of nonpayment is allocated according to indorser liability and drawer liability
(2)Indorsers Liability: Any indorser is liable for the amount of the check UCC § 3-415
(a)Indorser liable to person entitled to enforce the item and subsequent indorsers who paid the instrument
(b)Applies when check is dishonored
(i)Banks must give notice of dishonor to indorsers by midnight deadline
(ii)Other parties must give notice of dishonor to indorsers within 30 days
(c)Indorser Liability can be disclaimed by stating "without recourse" after indorsement
(3)Drawer Liability: Drawer of the check is liable if the bank dishonors the check UCC § 3-415
ii)Forgeries
(1)Forged Drawer's Signature
(a)If the Payor Bank Pays
(i)Payor bank should not have charged the customer's account
(ii)Payor bank bears the risk of loss
(iii)Bank deemed to know the signature of its customers Price v. Neal
(iv)Payor bank almost always bears risk, but there are two very limited exceptions:
- Payment by Mistake: UCC § 3-418
- If payor bank pays under mistaken belief that drawer's signature was authorized, payor bank can recover from the person who benefited from the payment
- Exception: Person took in good faith and for value (fails here because most times everyone in the chain takes in good faith and for value)
- Presentment Warranties UCC § 4-208
- Banks that present checks to payor bank warrant that they do not actually know that the drawer's signature is forged
- Fails here because everyone in the chain would have to "actually know" that the scoundrel forged the drawer's signature—most times, they don't actually know
(b)If the Payor Bank Dishonors
(i)Presenting banks bear the risk of loss
(ii)Loss can be passed to the earliest solvent party that dealt with the thief
(2)Forged Indorsements
(a)If the Payor Bank Pays
(i)Payor bank should not have charged the customer's account
(ii)Payor bank bears the risk of loss
(iii)To shift the loss, Payor Bank can pursue Presentment WarrantyUCC § 4-208
- Banks that present checks for payment warrant that
- Transferor entitled to enforce the item
- No alterations
- Transferor does not actually know that the drawer's signature is forged
- Once proven, loss shifts to the parties that breached presentment warranties
(b)If the Payor Bank Dishonors
(i)Presenting bank bears the risk of loss
(ii)To shift the loss, presenting bank can pursue Transfer WarrantyUCC § 4-207; UCC § 3-416
- Customers and collecting banks that transfer items and receive settlement or consideration warrant that
- Transferor is entitled to enforce the item
- All signatures are authentic and authorized
- There are no alterations
- Once proven, loss shifts to the earliest solvent party that dealt most closely with the thief
iii)Alterations
(1)Incomplete Checks Later Completed UCC § 3-407
(a)Payor bank can pay the full amount of the check as written
(b)Payor bank can charge the drawer for the amount
(c)Rationale: drawer should've done a better job completing the check
(2)Terms of the Check have been changed UCC § 3-407; 4-401
(a)Drawer can only be charged according to the check's original terms
(b)Payor bank can sue under presentment warranty to recover the balance UCC § 4-208
e)Special Risk of Loss Rules (Risk can Shift Back to the Customer)
i)Negligence UCC § 3-406
(1)General Negligence (Bank's Burden of Proof)
(a)Failure to exercise ordinary care
(b)Substantially contributes to alteration or forgery
(c)Effect: legitimizes any forgery
(2)Comparative Negligence (Customer's Burden of Proof)
(a)Bank must also exercise ordinary care in payment
(b)Bank can share the loss if there was an obvious forgery
(c)Plaintiff bears burden of proving comparative negligence
ii)Bank Statement Rule UCC § 4-406
(1)Banks are not required to issue statement but do so to avoid liability. Statement includes
(a)Copies of the checks or
(b)Sufficient information so the customer can identify the check
(2)Customer must exercise reasonable promptness to examine and determine any unauthorized activity
(3)If customer does not act reasonably prompt, customer cannot assert against the bank
(a)Any unauthorized signatures or alterations
(b)Subsequent forgeries by the same wrongdoer
(4)One Year Rule: If customer waits one year to report forgeries, customer is liable for all forgeries during that year
iii)Employee Fraud UCC § 3-405
(1)General Rule: Employers are not responsible for employee fraud if they exercise ordinary care
(2)Ordinary care means safeguarding checks Comment
(3)Exception: If the employee has check-writing authority, employer can be liable for the amount of the check
iv)Imposters UCC § 3-404
(1)If imposter induces drawer to issue an instrument, the forgery is deemed properly payable
(2)Risk of loss shifts to the drawer
(3)Rationale: drawer dealing with the imposter is in the best position to prevent fraud
v)Conversion UCC § 3-420
(1)Instruments (checks) are personal property
(2)At common law, conversion was aimed at scoundrel
(3)Under Article 3, bank can be liable if
(a)Payor bank pays on the instrument
(b)Payment made to a person not entitled to enforce the instrument
2)Credit Cards
a)Defined: any card or credit device existing for the purpose of obtaining something on credit TILA § 103
i)Cannot be issued by bank unless requested by customer TILA § 132
ii)Bank must give clear and conspicuous disclosure of rules governing use Reg. Z § 226
b)Billing Errors & Liability TILA § 161
i)Billing error: item that appears on a credit card statement that does not reflect an actual transaction on the account. Examples:
(1)Transaction that did not occur
(2)Charged wrong amount (double swipe)
(3)Statement does not reflect customer's payment
(4)Computation error
(5)Good/services never received
ii)Customer's Duty TILA § 161
(1)Notify the issuing bank in writing within 60 days
(2)Indicate name and account number
(3)Indicate the believed error and why it's an error
(4)State the amount of the error
(5)Send to the proper office for billing disputes
(6)Remedy for Billing Error--Refund if already paid; If not already paid, withhold payment TILA § 170
iii)Bank's Duty TILA § 161
(1)Acknowledge in writing within 30 days after customer's notice
(2)Correct the error within two complete billing cycles or
(3)Send documentation and evidence that the bill is correct
(4)Interest does not accrue until customer is required to pay
(5)Bank cannot accuse customer of bad credit while dispute is pending. BelmontCase.
(6)Liability: Bank loses the first $50 of dispute if fails to comply with procedure
c)Unauthorized Use & Liability
i)Authorized Use
(1)User has actual or apparent authority to use the card
(2)Bank has burden to prove the charge was authorized by the customer
ii)Unauthorized Use TILA § 103
(1)Use by a person who has no actual, implied, or apparent authority and
(2)Customer receives no benefit
iii)Liability for Unauthorized Use TILA § 161
(1)Preconditions to liability
(a)Accepted card
(i)Signed
(ii)Cardholder requested or applied for and received or
(iii)Used or authorized another to use the card
(b)Issuer gave customer notice of liability and a place to call for dispute
(c)Card has signature line (so merchant can identify the cardholder)
(2)Liability
(a)Cannot exceed $50 or
(b)Value of goods or services obtained (if less than $50)
(c)Rare Exception: Bank statement rule for egregious negligence Minskoff.
iv)Small Business Rules TILA § 135
(1)Generally, TILA does not apply
(2)Exceptions
(a)Bank can't send unsolicited credit cards to businesses
(b)Businesses can be liable for fraud
(3)Business Agreement
(a)Bank issues cards to ten or more employees
(b)Bank and business can agree that employer will eat the loss for unauthorized use
(c)Liability for each unauthorized employee transaction cannot exceed $50
d)Customer's Right to Refuse Payment to Issuer for Merchant's Breach of CC Transaction TILA § 170
i)Cardholder can refuse payment of credit card bill for a purchase if
(1)Customer made a good faith effort to resolve the dispute with the merchant
(2)The purchase is more the $50 and
(3)The purchase was made within the same state as the address on the card or within 100 miles of that address if the purchase was made out of state
ii)The amount of the claim or defense that the customer can assert against the issuing bank cannot exceed the amount of outstanding credit
3)Debit Cards (Electronic Funds Transfer)
a)Defined
i)Transfer initiated by electronic terminal, phone, or computer to order a bank to pay EFTA § 902
ii)Point of sale transfers (used at merchant's location)
iii)ATM transfers (deposit or withdraw)
iv)Bank must provide statement at the time of transfer (receipt) and periodic statement EFTA § 906
b)Error & Liability EFTA § 908
i)Customer's Duty
(1)Customer must notify bank within 60 days of receiving "documentation" of error
(2)Notification can be oral or written
ii)Bank's Duty
(1)Bank must investigate within 10 days and recredit customer's account on 11th if there was an error or
(2)Bank can provisionally credit customers account within 10 days and conduct investigation within 45 days (time limit can be extended)
(3)Liability: If there was error, bank must recredit
(4)If there was no error, bank must send customer explanation within three days after conclusion of the investigation
c)Unauthorized Use & Liability EFTA § 909
i)Unauthorized Use
(1)Transfer initiated by a person
(2)Without actual authority to initiate the transfer and
(3)Customer receives no benefit from the transfer
ii)Customer's Liability
(1)Preconditions
(a)Accepted card (received and activated)
(b)Issuer provided means to identify the customer (PIN or signature)
(c)Issuer provided notice of liability to customer
(2)Liability of Customer
(a)If customer notifies bank immediately, customer is liable for no more than $50
(b)If customer waits more than (2) days after learning of the loss, customer can be liable up to $500
(c)Bank Statement Rule for EFTs: If customer waits more than (60) days after bank sends the first bank statement indicating unauthorized transaction, liability is unlimited for all losses after the 60th day
(d)Limitation on liability applies whether or not the customer was negligent
(i)Extenuating circumstances may be asserted to extend the time limits.
4)Wire Transfers
a)Defined UCC § 4A-103; 4A-104
i)Funds Transfer is a series of transactions from the originator's payment order to the acceptance by the beneficiary's bank
ii)Payment order is an unconditional instruction of a sender to a receiving bank
b)Payment Order #1
i)Originator (Sender) to Originator's Bank (Receiving Bank)
ii)Originator's Bank can accept or reject
iii)To accept, originator's bank must execute the payment order (send payment order #2) and debit originator's account UCC § 4A-209