This question does not have an easy answer. Illinois law has long granted banks the freedom to post checks in any order they choose, without regard to the order in which they were received. However, as discussed below, the federal banking agencies have issued guidances that discourage the use of high-to-low posting orders (without explicitly condemning the practice). In addition, a number of recent multimillion dollar lawsuit settlements concerning posting orders in the context of ATM withdrawals and debit transactions indicate that banks should exercise a high degree of caution in establishing their posting order policies.

The Illinois UCC expressly permits banks to pay checks in any order. Relying on this fact, in 2002 an Illinois appellate court held this to be true even if the high-to-low order solely benefits the bank and results in bank customers incurring more overdraft fees than they would if the smallest checks were posted first.

Also, as to federal law, neither Regulation DD nor Regulation E requires banks to adopt any particular order for posting checks, nor do they require banks to disclose their posting order practices. However, the federal banking agencies released joint guidance on overdraft programs that states it is a best practice to “[c]learly explain to consumers that transactions may not be processed in the order in which they occurred, and that the order in which transactions are received by the institution and processed can affect the total amount of overdraft fees incurred by the consumer.”

In addition, the FDIC’s 2010 Overdraft Payment Supervisory Guidance states that “clearing items in the order received or by check number” is an “appropriate” procedure that would avoid “maximizing customer overdrafts and related fees through the clearing order.” The FDIC’s FAQ on the overdraft guidance fleshes this concept out, stating that checks “should be processed in a neutral order that avoids manipulating or structuring processing order to maximize customer overdraft and related fees. Examples of a neutral order include order received, check number, serial number sequence, or other approaches when necessary based on sound business justification.”

While the above FDIC Guidance relates only to automated overdraft payment programs, the FDIC has cautioned that “institutions that authorize overdrafts on an ad hoc basis should manage the potential reputational, compliance, and litigation risks regarding check clearing practices designed to maximize overdraft fees.”

We also note that although high to low posting of checks is expressly permitted by the UCC, the UCC does not address the propriety of this practice in connection with consumers’ ATM withdrawals and debit card purchases. Nor does any federal law or regulation directly govern the method of posting such transactions. In one 2011 case, a federal court in Illinois acknowledged the strength of applying the UCC’s check posting provision to debit card transactions, but despite this acknowledgement, the bank settled the debit card posting case for $9.5 million. Even more recently, a federal court of appeals in California ordered a bank to pay $203 million in restitution to customers based on that state's UDAAP-like statute and the fact that the bank’s marketing materials implied that debits were posted chronologically when it actually was posting debits on a high-to-low basis.

Finally, while the CFPB has not yet issued any rules regarding overdraft policies, the Bureau has published a whitepaper stating that the issue of the order of postings merits further analysis by the Bureau.

As you can see, this issue seems to be heading in the direction of federal and state UDAAP analyses, particularly in the context of posting ATM and debit transactions, notwithstanding the clear — but comparatively ancient — authority in Illinois to post checks in any order.

For resources related to our guidance, please see:

• Illinois UCC, 810 ILCS 5/4-303 (“Subject to subsection (a), items may be accepted, paid, certified, or charged to the indicated account of its customer in any order.”)

• Hill v. St. Paul Fed. Bank for Sav., 329 Ill.App.3d 705, 711-714 (1st Dist. 2002) (“There can be no lack of good faith in acting as authorized by the UCC. . . . Even if plaintiffs proved that the primary motivation of defendants was to maximize profits, their motive is irrelevant because their choice of the high-to-low posting method was authorized by the UCC . . . . Defendants here were not required to provide further information on posting order of overdrawn checks. Customers were left to inquire if they desired information about the order in which checks were posted.”)

• Regulation E, 12 CFR 1005.17 — Requirements for overdraft services

• Regulation DD, 12 CFR 1030.11 — Additional disclosure requirements for overdraft services

• Joint Guidance on Overdraft Protection Programs, 70 Fed. Reg. 9127, 9131  (February 24, 2005)   (“Clearly explain to consumers that transactions may not be processed in the order in which they occurred, and that the order in which transactions are received by the institution and processed can affect the total amount of overdraft fees incurred by the consumer.”)

• FDIC FIL 81-2010Final Overdraft Payment Supervisory Guidance Review check-clearing procedures of the institution and any third-party vendor to ensure they operate in a manner that avoids maximizing customer overdrafts and related fees through the clearing order. Examples of appropriate procedures include clearing items in the order received or by check number.”)

• FDIC Overdraft Payment Program Supervisory Guidance Frequently Asked Questions, Part III, Question 4 (“Transactions should be processed in a neutral order that avoids manipulating or structuring processing order to maximize customer overdraft and related fees. Examples of a neutral order include order received, check number, serial number sequence, or other approaches when necessary based on sound business justification. Re-ordering transactions to clear the highest item first is not considered neutral because this approach will tend to increase the number of overdraft fees. By contrast, processing batches of transactions in a random order or order received is a neutral approach; however, institutions should not arrange the order of types of transactions (i.e., batches) cleared in order to increase the number of overdrafts and maximize fees.”)

• FDIC Compliance Examination Manual, Lending Section, Overdraft Payment Programs, page 14.12 (“While the Guidance’s specific supervisory expectations relate only to automated overdraft payment programs, institutions that authorize overdrafts on an ad hoc basis should manage potential reputational, compliance, and litigation risks regarding certain overdraft payment practices, such as check clearing practices designed to maximize overdraft fees.”)

• Schulte v. Fifth Third Bank, 805 F.Supp.2d 560, 579 (N.D. Ill. 2011) (Accountholders brought putative class actions against bank, alleging that bank engaged in unlawful practice by processing debit card purchases and ATM withdrawals in high-to-low order, which resulted in higher overdraft fees than if transactions had been processed chronologically. In approving the $9.5 million settlement, the court acknowledged the strength of the bank’s argument that the UCC check posting provision should be applied to ATM postings.)

• Gutierrez v. Wells Fargo Bank, N.A., 704 F.3d 712 (9th Cir. 2012) (“Wells Fargo affirmatively reinforced the expectation that transactions were covered in the sequence made while obfuscating its contrary practice of posting transactions in high-to-low order to maximize the number of overdrafts assessed on customers . . . . Accordingly, the district court's holding that Wells Fargo violated the Unfair Competition Law by making misleading statements likely to deceive its customers is affirmed.”)

• CFPB Study of Overdraft Programs (June 2013) (“Our review is intended to provide the factual basis to inform efforts to develop more uniform treatment of these issues across financial institutions . . . . Our findings with respect to the number of consumers who are incurring heavy overdraft fees or account closures and the wide variations across institutions indicate that certain practices and procedures merit further analysis to determine whether they are causing the kind of consumer harm that the federal consumer protections laws are designed to prevent.”)