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COPYRIGHT © 2010 South-Western/Cengage Learning.
Who’s Who
• Despositary Bank – the first to take check.
• Payor Bank – the bank that pays the issuer’s check.
• Intermediary Bank – any bank that handles a check
during the collection process, except the depositary or
payor bank.
• Collecting Bank -- any bank that handles a check during
the collection process, except the payor bank.
• Presenting Bank – a bank that submits a check to the
payor bank.
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Bank’s Duty to Provide Information
• A bank is not required to provide a monthly
statement, but most do.
• A statement (if provided) must disclose:
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Interest rate paid
Amount of interest earned
Fees imposed by the bank
The number of days covered by the statement
• When an account is opened (and in ads), the
bank must disclose:
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Interest rate paid
How long this rate will be in effect
Requirements to earn the advertised rate
Fees or penalties imposed by the bank
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The Bank’s Duty to Pay
• A bank must pay a check if the check is
authorized by the customer and complies
with the terms of the checking account
agreement.
• A bank is not required to pay a check on
an overdrawn account, but may choose to
do so. It is then allowed to either repay
itself out of the next deposit or demand
immediate payment of the overdraft.
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Wrongful Dishonor
• If a bank violates its duty and
wrongfully dishonors an authorized
check, it is liable to the customer for
all actual and consequential
damages.
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Difficult Situations for a Bank
• The Death of a Customer
– Bank may continue to pay checks for ten
days after it learns of the death, unless it
receives a stop payment order from
someone claiming an interest.
• Incompetent Customers
– Once notified that a court has found a
customer to be incompetent, the bank is
liable if it pays the customer’s checks.
COPYRIGHT © 2010 South-Western/Cengage Learning.
Invalid Instruments
• Forgery
– If a bank pays when the issuer’s name is
forged, it must recredit the issuer’s account.
• Alteration
– If a check has been altered, the customer is
liable only for the original terms of the check,
and the bank is liable for the rest.
• Completion
– If an incomplete check is later filled in by
someone other than the original issuer, the
bank is not liable unless it was on notice that
the completion was improper.
COPYRIGHT © 2010 South-Western/Cengage Learning.
Dating on Checks
• Stale Checks
– A bank is not required to pay checks that
are presented more than six months after
their date, but it is not liable if it does pay.
• Post-dated Checks
– A bank is not liable for paying a post-dated
check unless the customer has notified
the bank in advance that a post-dated
check is coming.
COPYRIGHT © 2010 South-Western/Cengage Learning.
Stop Payment Orders
• As a general rule, if a bank pays a check
over a stop payment order, it is liable to
the customer for the loss he suffers.
• The “bank is subrogated to” the rights
of the parties, which means that the
bank can substitute for, or take the
place of, either party.
COPYRIGHT © 2010 South-Western/Cengage Learning.
Substitute Checks
• Congress recently passed the Check 21
Act, which allows a bank to digitally
reproduce a check so that it can be
processed electronically, rather than
transported by plane, truck or train.
• At any point along the processing of a
digital check, it can be printed, creating
a substitute check which is legally the
same as the original check.
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Expedited Funds Availability Act
• In theory, Check 21 Act should make funds available
in your account more quickly, but does not regulate
how soon banks must make funds available. That
issue is controlled by the Expedited Funds
Availability Act.
• Because a bank is at greater risk of loss when a
customer withdraws cash, he generally can only
withdraw the first $100 in cash on the next business
day after depositing a check. He can withdraw $400
more in cash by 5:00 p.m. on the same day that the
funds are available for check writing.
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Electronic Banking
• Today’s consumers have options for
banking that were barely imagined a
generation ago:
– Automatic Teller Machines (ATMs) that dispense cash, allow
transfers and accept deposits
– Point of Sale terminals that allow the use of debit cards
(deducting the funds directly from a checking account)
– Automatic deposit systems
– Services that allow bills to be paid over the telephone lines
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Provisions of the Electronic Fund
Transfer Act of 1978
• Employers may require all employees
to accept payment by electronic
transfer (direct deposit), but may not
require that it go to a particular bank.
• Electronic fund transfer cards (ATM,
debit, etc.) sent without a customer’s
request must be invalid until the
consumer activates it.
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Electronic Fund Transfer Act (cont’d)
• Documentation of electronic transfers
must be provided both at the ATM and in
monthly or quarterly statements.
• Preauthorized transfers (such as an
automatic mortgage payment) must be
authorized in writing.
• Errors
– If reported within 60 days, a bank must
investigate an error within the next 10 days or
provisionally credit the account until the
investigation can take place.
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Electronic Fund Transfer Act (cont’d)
• Consumer Liability for Unauthorized
Transactions (stolen ATM card)
– If reported within 2 days of theft: consumer
liable for $50, bank liable for the rest.
– If more than 2 days, but within 60 days of
theft: consumer liable for up to $500.
– If not reported within 60 days, consumer is
liable for the full amount of loss.
• Bank’s Liability
– If a bank fails to make an authorized
electronic fund transfer, it is liable for
damages caused by the nonpayment.
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Electronic Fund Transfer Act (cont’d)
• System Malfunctions
– If a payment cannot be made due to a system
malfunction, the obligation is suspended until
the malfunction is repaired or the intended
recipient has asked, in writing, for a nonelectronic payment.
• Disclosure
– The provisions of the EFTA must be disclosed
in clear language to a consumer opening an
account with electronic fund transfer
capability.
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Wire Transfers
• A wire transfer is a type of payment order
that “pushes” money out of the issuer’s
account into the payee’s.
• UCC Article 4A governs nonconsumer
wire transfers.
• The originator is the person who sends
the payment order; the beneficiary
receives the payment order.
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Bank Errors
• Bank Sends the Wrong Amount
– Bank is liable when too much money is sent; it
may try to recover from recipient.
• Bank Sends Money to the Wrong Person
– Bank is liable when money is sent to the wrong
person; it may try to recover from recipient.
– If bank sends money to wrong account, but that
account number was given by the originator, the
bank may not be liable.
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Privacy
• Financial institutions must disclose to consumers
any non-public information they wish to reveal to
third parties.
• A financial institution cannot disclose this private
information if the consumer opts out (or denies
permission).
• A small number of states require an “opt-in”
standard, which means that a financial institution
cannot divulge private data unless the consumer
affirmatively grants permission.
COPYRIGHT © 2010 South-Western/Cengage Learning.