We find that many credit union employees have only a vague understanding of the laws and regulations that apply to checks and share drafts. Given this lack of knowledge, credit unions are vulnerable to potential losses. Here are a few reminders on some check laws or regulations that are commonly misunderstood, and what problems these misunderstandings can cause.
Membership / Account Agreement
First, your membership or account agreement includes many provisions that can protect your credit union from potential check losses. The check laws allow for member agreements that provide more protections than the standard provisions of state and federal regulations. Make sure you know what your agreement states about issues such as the collection of checks for deposit, the handling of postdated or stale dated share drafts, and requirements for your members to report disputed or fraudulent items within the stated deadline. You might be surprised to find that your agreement can shield the credit union from many possible losses. That’s why the agreement was developed in the first place!
Checks Accepted For Deposit
Next, let’s look at checks accepted for deposit. By the way, none of the regulations require that you accept all checks for deposit. If you believe that the check may not be paid for whatever reason, you can refuse to accept it – or only accept it for collection – and not for deposit. If you still want to accept the check, use the availability holds as outlined in your policies and disclosures. Regulation CC maximum holds periods only apply to deposits into share draft accounts. If you want a longer hold period, deposit the check into a savings or regular share account.
Returned Check Deposits
Deposited checks can be returned unpaid long after the normal return deadlines. Regulation CC requires the payor banks to send NSF and Closed Account type returns within a few days. However, as a depository bank or bank of first deposit, your credit union automatically makes a legal guarantee or warranty that the check has not been altered and there are no forged endorsements. If the payor bank later discovers alterations or forged endorsements, you may be subject to a breach of warranty claim – meaning you may be charged for the unpaid check many weeks or even months after the original presentment. So you may want to reconsider decisions to accept checks with any endorsements you cannot verify – or at least accept them only after using a much longer hold period before making funds available to your member.
Member Signature on Share Drafts
The biggest risk in processing your member share drafts is the need under state laws to verify the authenticity of your member’s signature on the front of the check. Given the volume of share drafts and the time required to verify signatures, it is not practical for the credit union to verify signatures on member share drafts. However, the law places the risk of loss on the financial institution in the best position to prevent a loss. Since your credit union has access to share draft images and member signature cards, you will probably suffer the majority of losses.
The normal 24-hour return deadline applies to a “forged drawers signature” return as these are called under the Uniform Commercial Code. You can attempt to return these drafts after the normal deadline, and you may be successful in recovering on the loss – but the legal liability is clearly on the credit union. You may also consider some random signature verifications on large value share drafts in order to mitigate possible losses. This procedure is probably more practical with business accounts that normally issue share drafts for larger amounts, and may be targeted for fraud more frequently.
Cashier’s and Teller’s Checks
Finally we have a few words on your cashier’s or teller’s checks. State laws give special status to these types of checks, and place extra liability on your credit union if you decide to return them unpaid. Remember that your member – the purchaser of the cashier’s/teller’s check – cannot stop payment on this type of check. They can request a refund on the check. However, in order to fully protect your credit union against paying on the check twice, you must have your member complete your Claim Form / Declaration of Loss…and then process the refund after 90 days have passed since the issuance of the original check. If you decide to issue a refund before the 90 day time period outlined in state law, be aware of the potential losses if the original check is rightfully presented by the payee or holder for payment before 90 days.
THE INFORMATION PROVIDED IS GENERAL INFORMATION AND IS NOT TO BE CONSIDERED LEGAL ADVICE ABOUT THE SUBJECT MATTERS COVERED OR ANY SPECIFIC LEGAL ISSUE. THE ADVICE OF AN ATTORNEY SHOULD BE OBTAINED AS APPROPRIATE TO SPECIFIC ISSUES AND FACTUAL SITUATIONS.