Regulations - Uniform Commercial Code National Check Payments Certification. Regulations Uniform Commercial Code

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1 NCP 2017 Exam Cycle Core Training Series Session 2 Regulations Uniform Commercial Code Copyright 2016 by the Electronic Check Clearing House Organization NOTICES This training course may provide an introduction to or summary of various aspects of check payments and the legal and rules framework for check image exchange. Responsibility for compliance with image exchange rules, and/or the legal, operational and regulatory requirements applicable to check image exchange, remains at all times with the financial institution participating in check image exchange and/or the individual or company using a check image exchange service. This presentation and the information contained herein is not intended as legal or compliance advice or recommendation to any person or company. This document could include technical inaccuracies or typographical errors and individual users are responsible for verifying any information found in this presentation and related live webinar or webinar playback. Financial institutions should consult with their legal counsel regarding legal and operational requirements applicable to any check image exchange program they may offer or in which they participate. These materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO. Copyright 2016 by the Electronic Check Clearing House Organization (Certain contributed content subject to third party copyrights) 2 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 1

2 NCP Exam Registration Reminder Free ECCHO / NCP study aids upon registration! JumpStart Reading Program Links to all program resources NCP Roadmap Direction on establishing a personalized study plan P.R.E.P. Guide Training guide, glossary of terms, sample exam Question of the Day & Summary New daily question & detailed answer to prior day s question Exam Fees: $400 ECCHO member $500 non ECCHO member Not sure about membership? Check current status at: o Enter financial institution name in search box on left 3 Topics This Session Warranty and Indemnity in Payments Uniform Commercial Code (UCC) Article 3 Negotiable Instruments Article 4 Bank Deposits and Collections Review UCC Transfer and Presentment Warranties Q&A 4 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 2

3 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 manner Rules 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 5 Warranty and Indemnity in Payments Role of Uniform Commercial Code (UCC) Model state laws as adopted by each state Example: 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 rules Example: Chain of warranties and forged and counterfeit check warranty Federal Reserve Operating Circulars Rules governing all exchanges to /from FRB Example: Defines liability of the FRB vs. presenting or returning bank 6 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 3

4 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 IMAGE DUPLICATE IMAGE Paying Bank Breach of Warranty Claim Statement Paying Bank s Customer 7 Overview of Check Regulations Uniform Commercial Code Article 3: Negotiable Instruments Article 4: Bank Deposits and Collections Focus of this session 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 8 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 4

5 Uniform Commercial Code Uniform Commercial Code Purpose Set of standardized state laws that govern business and financial contracts; first published in 1952 Establishes general duty standards for parties to act in good faith and exercise ordinary care in their transactions. UCC and revisions written by experts in commercial law Updates submitted as drafts for approval to National Conference of Commissioners on Uniform State Laws (NCCUSL) Group now referred to as the Uniform Law Commission (ULC) Model state law must be adopted by each state Enacted in all 50 states and District of Columbia, Puerto Rico, Guam and U.S. Virgin Islands Together with case law, Articles 3 and 4 document legal boundaries for most aspects of check processing 10 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 5

6 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 11 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 12 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 6

7 UCC 3 Negotiable Instrument What s the difference between a negotiable instrument, a draft and a check? UCC defines a negotiable instrument as a Note" if it is a promise to pay; and Draft" if it is an order to pay Within this definition it states a: o "Check" is a draft payable on demand Graphic on next slide illustrates the key components of a check as described within this negotiable instrument definition 13 UCC 3 Negotiable Instrument 14 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 7

8 UCC 3 Negotiable Instrument Written order signed by the drawer Must be a writing (physical item) Unconditional promise or order to pay a fixed sum of money on demand or at a fixed time Unconditional unless one of the following is true: The promise or order: States an express condition to payment; or Is subject to or governed by another record; or Has rights or obligations stated in another record 15 UCC 3 Check Definition "Check" means a: Draft: Payable on demand / drawn on a bank; or Cashier's check or teller's check May be check even though described by another term, such as "money order Cashier s Check and Teller s Check Cashier s check: Drawer and drawee (Paying Bank) are the same Teller s check: Drawn by a bank on another bank or payable through a bank 16 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 8

9 UCC 3 Demand Instrument Payable on demand or at a definite time Keep in mind UCC talks about both drafts (checks) and notes (promises to pay) in the section on negotiable instruments On Demand Payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder Does not state any time of payment At a Definite Time Payable upon elapse of a definite period of time after sight or acceptance; or At a fixed date; or a time readily ascertainable when order is issued Date of instrument Day on or after which the transfer of the amount of the check may take place Required for negotiability If undated, the date is: Date of its issue or Date it first comes into possession of a holder 17 Issue of the Instrument Issue: First delivery of the instrument by drawer, whether to a holder or nonholder Issuer: Drawer of an instrument. Applies to issued and unissued instruments Unissued instrument, whether complete or incomplete, is binding on the drawer Drawer could use non issuance as a defense in a dispute See UCC for details 18 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 9

10 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; or Indicates that the person in possession of order is entitled to payment; or Does not state a payee; or Is payable to cash 19 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 terms Handwritten terms prevail over both Words prevail over numbers 20 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 10

11 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 B Both must indorse and negotiate 21 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 22 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 11

12 UCC 3 Signature Authorizes the paying bank to disburse funds Required for negotiability Must coincide with the conditions of payment on the signature card Example: Two signature required May contain restrictive notations for which bank may require an indemnity Examples: Not Valid over $1,000 Two signatures required if greater than $2, 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 24 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 12

13 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 25 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 Individual Payee Holder of Check $ Deposits or Cashes Check Exchanges check for value Depositary Bank 26 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 13

14 Holder Definition (UCC 1 201) Defines "Holder" as: Person in possession of a negotiable instrument that is payable either to bearer or to the identified person in possession In the negotiation example on prior page: 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 27 Holder and Holder in Due Course Holder: Person in possession of a negotiable instrument Holder in Due Course (HIDC) (UCC 3 302) Holder who has possession, that: Took the item in good Faith Took item for value Without notice the item is overdue or has been dishonored Without notice signature was unauthorized or item altered Without knowledge of claims against it HIDC concept Represents a chain of ownership No other payment system has this 28 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 14

15 UCC 3 Overdue Instrument One of the provisions that allows a holder to claim holder in due course status concerns the date of the instrument UCC discussed on prior slide includes provision that item cannot be overdue or dishonored Overdue: An instrument payable on demand that is a check becomes overdue: 90 days after its date 29 HIDC Benefit UCC 3 302: Benefit to having HIDC status: Can enforce item against drawer HIDC can make a claim to the person who signed the check and ordered payment (drawer) o Even if that check was returned unpaid by the drawer s bank (Paying Bank) 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 HIDC provisions allows HIDC to make a claim directly back to Drawer 30 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 15

16 HIDC Stop Pay Example (1) Goods Purchased (3) Chargeback XAttempt; Payee Closed Account (1) Check Deposited Image Drawer (2) Goods found to be fraudulent SalesPerson / Payee / Depositor Bank of First Deposit (BOFD) (4) BOFD /HIDC Claim (2) Drawer issues Stop Pay order Image Returned (3) Paying Bank Depositary Bank (BOFD) is Holder In Due Course Can make claim back to Drawer 31 HIDC Stop Pay Example Narrative Scenario: Sales Person sold a watch to the Drawer as pictured here. Drawer issues check listing Sales Person as the Payee to pay for what is believed to be a Rolex. The goods (the watch) later turns out to be a fake/counterfeit watch. The following outlines the steps in this scenario: 1. Payee Sales Person accepts a check payment for the watch and then deposits the check in their bank. That BOFD creates an image and sends it to the Paying Bank. 2. Drawer has now discovered the watch is no good and issues a Stop Payment order on the check to their bank the Paying Bank. 3. Paying Bank returns the check to the Depositary Bank (BOFD) based on the Stop Payment order. However by now our Sales Person/ Payee has withdrawn all the funds and left town. What recourse do the banks now have assuming the BOFD is a holder in due course (HIDC) on the check? 4. BOFD can recover the amount of check from the Drawer Regardless of defenses Drawer might assert against the Payee of the check (i.e., Rolex is counterfeit) 32 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 16

17 HIDC Claims Holder in Due Course claims now more common due to customer RDC issues Customer sends image of check using remote deposit capture; then cashes or deposits the original check Challenging duplicate issue because: Caused from outside banking system By the customer not the depositary financial institution HIDC may have original check and may demand payment from drawer Potentially harder to resolve Warranty for no double debit (duplicate warranty) Covers HIDC duplicate warranty claims See next example 33 HIDC Duplicate Example RDC Customer 1 2 IMAGE RDC Deposit Agreement 3 Check Casher (HIDC) BOFD A 5 IMAGE Charge Account IMAGE (ICL) 4 3 BOFD B 8 Duplicate Adjustment Claim to BOFD A IMAGE 4 Return or Adjust as Duplicate D U P L I C A T E D E C T E C T I O N Drawer Pays Claim Paying Bank 2 Statement Drawer Requests $$$ 7 Bank Reimburses Drawer Drawer 6 Check Casher makes HIDC Claim 34 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 17

18 HIDC Example (review of prior slide) 1. RDC Customer snapped a picture of the check with his mobile device and remotely deposited item at BOFD A 2. BOFD A presents check to Paying Bank; Item is paid and charged to the drawer s account 3. Customer then cashes the original check at the Check Casher who then remotely deposits item at BOFD B Check Casher took check in good faith without knowledge of any issue with check Check Casher is the Holder of item and has original item BOFD B sends check to Paying Bank in an image cash letter 4. Paying Bank has dup detection and catches duplicate presentment; Paying Bank returns / adjusts item (depending on timing) back to BOFD B, who charges the item back to their Check Casher customer Paying Bank could make duplicate claim to either BOFD B or BOFD A Both made the same image warranties to the Paying Bank 5. Check Casher, holding the original check, now makes claim directly to Drawer as allowed under UCC With demand letter outside banking system Can only make HIDC claim to drawer (person who ordered payment) 6. Drawer already paid item (when posted to its account at Paying Bank), but...agrees to pay HIDC Check Casher due to fear of potential bad credit 7. Drawer then requests reimbursement from Paying Bank for item it already paid Was charged for the same item twice:» By the Paying Bank (BOFD A s item)» By the demand from the Check Casher (BOFD B s item) Paying Bank may reimburse the Drawer 8. Paying Bank can now make claim to BOFD A under duplicate warranty on the image BOFD A sent 35 Depositary Bank & Unindorsed Item Depositary bank becomes a holder of the item at the time it receives the item for collection If the customer at the time of delivery was a holder of the item Whether or not the customer indorses the item Depositary Bank warrants amount of the item was paid to the customer or deposited to the customer's account 36 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 18

19 UCC 3 Indorsement Signature alone or accompanied by other words for purpose of: Negotiating the instrument Example: Cash or deposit check Restricting payment of instrument Examples: o Pay Any Bank : Bank s restrictive indorsement o For Deposit Only : Payee restrictive indorsement Incurring indorser s liability on instrument Transfers ownership to another party Example: Payee indorses check to deposit o Transfers ownership of the instrument to the Depositary Bank Payee Indorsement Need not be exact May be substantially similar as clarified in 1991 revision to UCC (3 404) Example: Check is payable to Robert Smith May indorse as Bob Smith 37 UCC 3 Payee Indorsements Blank Indorsement Payee simply signs his/her name Blank does not mean un endorsed Check becomes a bearer instrument and can be transferred to anyone simply by giving the check to another party Special Indorsement Transfers the check to a specified payee Endorsed as payable to someone else Negotiation then requires that person s subsequent indorsement 38 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 19

20 UCC 3 Payee Indorsements Restrictive Indorsement Imposes limitations on transferring check Conditional or qualified indorsement Common example: For Deposit Only Anomalous Indorsement Made by person who is not holder of the instrument Only effect of anomalous indorsement Makes the signer liable on the instrument as an indorser Normally made by an accommodation party (defined in UCC3 419) 39 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) 40 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 20

21 UCC 3 Employer s Responsibility Covers two categories of fraudulent indorsements made by employees Indorsement made in name of employer on instrument (check) payable to employer; and Indorsement made in name of payee on instrument (check) issued by employer 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 Employee was entrusted with responsibility for checks Bank was not negligent Employer is liable and not the Paying Bank 41 Forged Drawer s Signature Price v. Neal Case decided in English court in 1762 Decision 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 presentment warranties in sections 3 417(a) and 4 208(a). 42 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 21

22 UCC 3 Presentment Demand for payment made to drawee (Paying Bank) Made by/on behalf of a person entitled to enforce an instrument Consider each of the following: Location When is it effective What s provided to Paying Bank Timing/cut off considerations See table on next page for details 43 UCC 3 Presentment Location for presentment Effective when: Must provide Drawee: Drawee may return or refuse without dishonoring Timing of Presentment : Can be by agreement of the parties Presentment made at place of payment by any commercially reasonable means: Oral, written, or electronic communication (if electronic presentment is authorized) Demand for payment is received by drawee The instrument unless otherwise agreed by the parties Such as in electronic presentment agreements Return for lack of a necessary indorsement, or Refuse payment for failure of presentment to comply with terms of instrument, agreement of parties, or other applicable law or rules Drawee may establish cut off hour May treat presentment as next business day after day of presentment if items presented after cut off hour 44 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 22

23 UCC 3 Presentment Presentment initiates two requirements for Paying Bank (drawee that s ordered to make payment) Return clocks start (timing for return or pay decision) UCC midnight deadline; and Reg CC expeditious return requirement Required to pay a properly payable item (see definition on next slide) Item is finally paid when Paying Bank has done one of the following: o Paid item in cash; o Settled for item without a right to revoke settlement o Made a provisional settlement but failed to revoke settlement in time» Timing/manner of settlement by statute and as agreed upon based on clearinghouse rule or agreement Once item is considered presented bank may also charge the customer s account In accordance with the terms of their agreement and in compliance with all laws 45 UCC 4 Properly Payable Item is considered properly payable if it is Authorized by the customer, and In accordance with agreement between the customer and bank UCC 4 provisions may be altered by agreement of the parties See UCC for additional details 46 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 23

24 UCC 4 When Bank May Charge Account Bank May Charge Customers Account If an item is properly payable Even though the charge creates an overdraft Customer 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 check Unless customer has given notice to bank of the postdating describing the check with reasonable certainty 47 UCC 4 Other Date Considerations UCC Article 4 defines the bank s obligation with regard to paying a check based on date considerations Post dated checks Bank may charge a customer s account even though payment is made before the date on the check o Unless the customer gives bank notice of the postdating Stale dated checks (UCC 4 404) Bank may, but is not obligated to, pay a check presented more than six months after its date 48 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 24

25 Customers Duty to Report Customers Duty to Discover and Report Unauthorized Signature or Alteration [Section UCC (a) (e)] Bank that sends a statement of account must: Return or make available to the customer the items paid, or Provide sufficient information for the customer to reasonably identity paid items Customer must comply with review and notice duties to: Exercise reasonable promptness in examining the statement; and Promptly notify the bank of any unauthorized/altered item(s) If Bank proves customer failed to comply with these duties, customer is precluded from asserting against the Bank the: Customer s unauthorized signature or alteration on the item, if bank proves they (the bank) suffered a loss by reason of the customer s failure; and Customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the Bank if: Payment was made before Bank received notice from customer, or After customer afforded a reasonable period of time, not exceeding 30 days, in which to examine item or statement of account and notify the Bank 49 Customers Duty to Report (continued) Statute of Repose [Section UCC (f)] UCC establishes a second preclusion for customer s failure to notify Bank of unauthorized signature or alteration of item: Regardless of lack of care of either the customer or the bank: Customer who does not within one year after the statement or items are made available, discover and report unauthorized signature or alteration, that customer cannot claim the unauthorized signature or alteration o One year is the outside time limit for customer reporting of customer s unauthorized signature or alteration of item under this section 50 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 25

26 UCC Transfer and Presentment Warranties UCC Warranties Transfer Warranty Transfer Warranty Presentment Warranty Deposit Statement IMAGE IMAGE Agreement Customer BOFD Warranty travels with the item (Chain of warranties) From person (customer) to BOFD to Collecting Bank Transfer Warranties and To the Paying Bank Presentment Warranties Intermediary / Collecting Bank / Presenting Bank Paying Bank (Drawee) Company 52 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 26

27 Purpose of UCC Warranties Together with case law, Articles 3 and 4 document legal boundaries for most aspects of check processing UCC 3 provisions for Negotiable Instruments UCC 4 provisions for Bank Deposits & Collections Warranties provide recourse should a breach of warranty occur UCC Transfer Warranties: Made to a person or collecting bank that may then: Recover from warrantor, as damages for breach of warranty, an amount equal to the loss suffered as a result of the breach, but not more than the amount of the instrument (item) o Plus expenses and loss of interest incurred as a result of the breach UCC Presentment Warranties: Made to the drawee (Paying Bank) that pays the item; who may then: Recover from warrantor damages for breach of warranty equal to the amount paid, less the amount they received from drawer because of the payment o Plus compensation for expenses and loss of interest resulting from the breach. 53 UCC Transfer Warranties (3 416 & 4 207) Person (or Customer or collecting bank) that is transferring an instrument (item) warrants: Warrantor is a person entitled to enforce the instrument (item); All signatures on the instrument (item) are authentic and authorized; Instrument (Item) has not been altered; Instrument (Item) not subject to defense or claim; Warrantor has no knowledge of any insolvency proceeding with respect to the maker For remotely created consumer item, person on whose account the item is drawn authorized item and amount for which the item is drawn 54 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 27

28 UCC Transfer Warranties Transfer Warranty from Consumer to Merchant Makes a purchase and Pays with a Check Transfer Warranty from RDC Customer to BOFD Scans & Remotely deposits check Transfer Warranty from BOFD to Collecting Bank Image Image Image Check payment RDC deposit ICL transmitted ICL transmitted Consumer Customer Merchant/ RDC Customer Bank A / Bank of First Deposit (BOFD) Bank B / Collecting Bank/ Presenting Bank Paying Bank Does the UCC Transfer Warranty extend to Paying Bank? No Stops with last collecting bank in forward presentment chain 55 UCC Presentment Warranties (3 417 & 4 208) Person obtaining payment and previous transferor, at the time of presentment warrants they are: Entitled to enforce draft Or authorized to obtain payment/acceptance on behalf of a person entitled to enforce the draft; and Item has not been altered; and Warrantor has no knowledge that signature of the purported drawer of the draft is unauthorized; and For remotely created consumer item, person on whose account the item is drawn authorized item and amount for which it is drawn 56 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 28

29 UCC Presentment Warranties (1). Receives a check drawn on Paying Bank; Cashes it at Paying Bank (2). Company accepts bill payments; receives checks drawn on Paying Bank; Scans and sends RDC deposit to Paying Bank (3). Depositary or Collecting Bank sends transit items drawn on Paying Bank in image cash letter (ICL) ICL Checks presented at Paying Bank Consumer Customer Company / RDC Customer RDC Deposit Check presented for deposit (via RDC) at Paying Bank Check presented and cashed at Paying Bank In each of the three (3) processes illustrated, which entity receives the UCC Presentment Warranty? Paying Bank (Drawee) Paying Bank UCC Presentment warranties made to Paying Bank (Drawee) when item presented for payment As shown here: Each person, company, depositary or collecting bank, that presents the item would make the UCC presentment warranties 57 Timing & Presentment Warranties Transfer Warranties from Customer to BOFD BOFD Transfer Warranties from BOFD to FRB FRB Paying Bank Scans and Deposits via RDC drawn on the Paying Bank Sends Image Cash Letter (ICL) with Items Drawn on Paying Bank Presentment Occurs Image ICL ICL Presentment Warranties at time of presentment Customer Presentment Warranties Presentment Warranties Which entity makes UCC Transfer Warranties vs. UCC Presentment Warranties? Transfer warranties made at time of transfer By entity transferring the item Presentment Warranties made at time of presentment By presenting entity and each prior transferor 58 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 29

30 Final Payment of Item Item: An order to pay money that is handled by a bank for collection or payment Does not include a payment order governed by Article 4A (Wire Transfer) Final Payment: Item is finally paid by payor bank (drawee) when payor bank has either: Paid the item in cash; Settled for the item without a right to revoke the settlement If a provisional settlement was made Item is finally paid if payor bank fails to revoke the settlement in the time permitted by statute or clearinghouse rule or agreement 59 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 60 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 30

31 Questions 61 Recommended Resources Uniform Commercial Code (UCC) Article 3 Negotiable Instruments Article 4 Bank Deposits and Collections Supplemental Materials UCC Warranties handout ECCHO Living PowerPoint video Light hearted play on duplicates and HIDC examples Link on ECCHO website to YouTube video ure=youtu.be 62 Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 31

32 Regulations Uniform Commercial Code Thank You! NOTICE This NCPC Program document contains copyrighted materials of its publisher. These materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO Copyright 2016 by the Electronic Check Clearing House Organization Copyright 2016 by ECCHO (Certain contributed content subject to third party copyrights) 32