Business Law II Chapter 24
Types of EFT
1. ATM's 2. Point-of-sale Systems (online terminals allow customers to transfer funds to merchants to pay for purchases using a debit card) 3. Direct deposits and withdrawals (work checks) 4. Online payment systems (transferring funds via the internet)
Availability Schedule for Deposited Checks (RULES)
1. Any local check deposited must be available for withdrawal within 1 business day from deposit date 2. Nonlocal, funds must be available for withdrawal within 5 business days 3. Check Clearing in the 21st Century Act, bank must credit a customer's account as soon as the bank receives the funds 4. For cash deposits, wire transfers, and government checks, funds must be available the next business day 5. The first $100 of any deposit must be available for withdrawal on the opening of the next business day after deposit
Regulation E Disclosure Requirements
1. Bank must provide a monthly statement for every month in which there is an electric transfer of funds. Must show the amount and date, name of third parties, location, fees 2. If debit card is lost or stolen, the customer will be required to pay no more than $50 if they notify within 2 days. Otherwise, liability is $500. May be liable for more if they wait 60 days 3. Customer must discover any error on monthly statement within 60 days and notify the bank. Bank has 10 days to investigate. If it takes more than 10 days, the bank must return disputed amount until it finds the error. If no error, the customer has to return the disputed funds 4. The bank must provide receipts for transactions made through computer terminals, but not for telephone transfers
Postdated Checks
A bank may charge a postdated check against a customer's account, unless the customer notifies the bank in a timely manner not to pay the check until the stated date
Notification of hold
A bank must notify the customer if they place a longer than normal hold on a customer's account
Checks Bearing Forged Indorsements
A bank that pays a customer's check bearing a forged indorsement must recredit the customer's account or be liable to the customer for breach Eventually, the loss usually falls on the first party to take the instrument bearing the forged indorsement Whoever takes it cannot become a holder
Stored-Value Card
A card bearing a magnetic strip that holds magnetically encoded data providing access to stored funds
Cashier's Check
A check drawn by a bank on itself Normally indicates a specific payee The bank assumes responsibility for paying the check, thus making the check more readily acceptable as a substitute for cash EX: Kramer needs to pay $8,000 to move. Moving company requests payment of cashiers check, Kramer goes to a bank (doesn't need an account) and purchases a cashier's check, payable to the moving company, for 8,000. The issuing bank must honor its cashier's checks when they are presented. If bank wrongfully dishonors, a holder can recover from the bank expenses and damages
Overdrafts
A check that is paid by a bank when the checking account on which the check is written contains insufficient funds to cover the check
Stale Checks
A check, other than a certified check, that is presented for payment more than 6 months after its date A bank is not obligated to pay, but has the option
The General Rule (Checks w/ Forged Drawers' Signatures)
A forged signature on a check has no legal effect as the signature of a customer-drawer Banks require signature cards from each customer who opens a checking account, allowing the bank to verify whether the signature is valid The bank must recredit the customer's account when it pays a check with a forged signature.
Other Parties from Whom the Bank May Recover
A forged signature on a check has no legal effect as the signature of a drawer The person who forged the signature is liable
Smart Cards
A plastic card containing tiny microchips that can hold more information than a magnetic strip can
Regulation E
A set of rules issued by the Federal Reserve System Board of Governors to protect users of electronic fund transfer systems
Check
A special type of draft that is drawn on a bank to pay a fixed amount of funds on demand
Electronic Fund Transfer
A transfer of funds through the use of an electronic terminal, smartphone, tablet, computer, or telephone Consumer governed by Electronic Fund Transfer Act Commercial by Article 4A of UCC
Nonproprietary ATM's
ATMs that are not owned or operated by the bank receiving the deposits, a 5 day hold is permitted on all deposits
Traveler's Checks
An instrument that is payable on demand, drawn on or payable at or through a financial institution Designated to be a safe substitute for cash for people who are on vacation Issued to fixed amounts, purchaser is required to sign the check when it is purchased and used
Check Collection Between Customers of the Same Bank
An item payable by the same bank that receives it is called an "on-us item" Usually the bank issues a "provisional credit" within the same day If bank doesn't dishonor the check by the opening of the 2nd banking day following its receipt, the check is considered paid
Stop-Payment Order
An order by a customer to his or her bank not to pay or certify a certain check Only a customer authorized to draw on the account can order the bank not to pay. Must issue within a reasonable time or manner Bank will be liable for wrongful credit
The Traditional Collection Process (Collecting Bank)
Any bank except the payor bank that handles a check during some phase of the collection process
The Traditional Collection Process (Intermediary Bank)
Any bank except the payor or depositary bank to which an item is transferred in the course of this collection process
Agency Relationship
Arises between customer and the bank when the customer writes a check on their account The customer is ordering the bank to pay the amount specified on the check to the holder when the holder presents the check to the bank for payment
New Account Restriction
Banks have 8 days to make funds available to new accounts (new since 30 days)
Electronic Check Presentment
Can be done the day of deposit Check info is encoded, transmitted electronically, and processed by other banks' computers Regulation CC provides that a returned check must be encoded with the routing number of depositary bank, amount of check, and other info
Creditor-Debtor Relationship
Created between a customer and a bank when the customer makes cash deposits into a checking account Customer becomes creditor, bank debtor
Altered Checks (Customer Negligence)
Customer negligence can shift the loss if a person carelessly writes a check leaving large gaps, or leaves the dollar amount blank for someone else to fill in
Altered Checks
Customer's instruction to the bank is to pay the exact amount on the face of the check. Bank has duty to examine check before making final payment If bank fails to detect alteration, normally it is liable to its customer for the loss (Difference of original amount and amount paid)
Altered Checks (Other Parties from Whom the Bank May Recover)
From the transferor who presented the check for payment A transferor, by presenting the check, warrants that it has not been altered. Exceptions: 1. Bank is also the drawer (cashier's check) 2. If the presenting party is an HDC
Certified Check
Has been accepted in writing by the bank on which it is drawn When a drawee bank certifies a check, it immediately charges the drawer's account with the amount of the check and transfers those funds to its own certified check account By certifying, the bank promises to pay the check at the time it is presented Bank stamps the word "certified"
Death or Incompetence of Customer
Neither revoke a bank's authority to pay an item until the bank is notified of the situation and has a reasonable amount of time to act on the notice Even when the bank knows of death, for 10 days after death it can pay or certify checks drawn on or before the date of death
The Federal Reserve System
Network of 12 district banks and related branches located around the country and headed by the Federal Reserve Board of Governors Most banks in the U.S. have accounts with the Federal Reserve
Check Collection Between Customers of Different Banks
Ones a depositary bank receives a check payable to another bank, it must arrange to present the check to the appropriate payor bank Each bank in the collection bank must pass the check on before midnight of the next banking day following its receipt UCC Permits "deferred posting", a bank may fix an afternoon hour of 2 PM or later as a cutoff hour for the handling of money and items and the making of entries on the books Any checks received after 2 PM may be treated as being received at the opening of the next banking day
Digital Cash/ E-Money
Prepaid funds stored on microchips in laptops, smartphones, tablets, and other devices
Availability Schedule for Deposited Checks
The Expedited Funds Availability Act and Regulation CC establish when funds from deposited checks must be made available to the customer.
Clearinghouse
The FRS acts as this - a system or place where banks exchange checks and drafts drawn on each other and settle daily balances
The Traditional Collection Process (Payor Bank)
The bank on which the check is drawn (the drawee bank)
The Traditional Collection Process (Depositary Bank)
The first bank to receive a check for payment
When the bank Is Also Negligent (Checks w/ Forged Drawers' Signatures)
The loss could be allocated between the bank and the customer
One-Year Time Limit
UCC places an absolute time limit on the liability of a bank for paying a check with a forged customer signature A customer who fails to report a forged signature within one year from the date of the bank statement loses the legal right to have the bank recredit his or her account
Regulation E Violations and Damages
Unauthorized access to an EFT system is a federal felony, and may be fined up to $10,000 and sentenced up to 10 years in prison. Banks are liable for any failure to adhere to EFTA provisions For a bank violation, a consumer may recover actual and punitive damages of not less than $100 and not more than $1,000.
Bank's Duty to Honor Checks
When a bank institution provides checking services, it agrees to honor checks written, as long as customer has sufficient funds When bank wrongfully fails to honor check, it is liable to its customer for damages resulting from its refusal to pay When a bank properly dishonors for NSF, it has no liability to the customer
Customer Negligence (Checks w/ Forged Drawers' Signatures)
When the customer's negligence substantially contributed to the forgery, the bank normally will not be obligated to recredit the customer's account for the amount of the check The customer liability may be reduced by the amount of loss caused by negligence on the part of the bank paying the instrument *Timely Examination required