Topic: Unauthorized Transactions
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We recently opened a new business checking account for ABC Inc. We later learned that the business is not in good standing with the Secretary of State, and it is our policy to close such accounts (and we have other misgivings about this particular customer). However, the customer already has deposited a check of several thousand dollars. The check was payable to “Smith and Smith,” but it was endorsed by ABC Inc. and deposited into ABC Inc.’s account at our bank.
The payor bank told us that they confirmed with the check’s drawer that the check is a legitimate payment for painting services and that the drawer wishes it to be paid so that painting will commence. The check itself did not include the drawer’s name or contact information, so we have no way of contacting the drawer directly. The payor bank will not guarantee that they won’t make a warranty claim based on the incorrect endorsement, nor will they return the original check to us. If we close the account, we will have to issue an official check to the customer, leaving us holding the bag if the payor bank later brings a warranty claim. But we don’t want to leave the account open, and if we freeze the account funds, the customer might refuse to begin the paint job and possibly expose us to a claim from the drawer. What should we do?—
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Unfortunately, the payor bank may have a potential claim against your bank for the proceeds of the check, and without more information about the drawer and the drawer’s account agreement with the payor bank, it might be difficult to determine whether your bank has a valid defense against such a claim, or when the period…
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We received a breach of warranty collection request from another bank, based on the alleged alteration of the payee on a check deposited into a customer’s account. The bank claims that the original payee was a business and that the payee line was altered to name the business owner individually, not the business. The bank included a copy of its customer’s check register as proof that the check was originally made out to the business, as well as a statement from the business acknowledging receipt of the check. We believe that the payee line was left blank and the business owner wrote in his own name. The check has no visible alternations, and our customer’s account into which this check was deposited has since been closed. Should we deny the claim? The check posted in January, and the drawer signed a fraud affidavit in December of the same year.
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Whether your bank should deny this claim is a business decision to be made based on the available facts and the likelihood of your success in court. In other words, whether your bank is liable to the payor bank for a breach of warranty is a question for a court to decide based on the…
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We have a business client who had a fraudulent check go through on their account. We are having a difficult time meeting the next day midnight deadline for returned checks. Can you confirm that we must comply with the midnight deadline? May we require business customers to notify us immediately of any fraud on their account once they receive their statement?
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Yes, banks generally must return checks by midnight on the next banking day after receiving the check, as required by the Illinois Uniform Commercial Code (UCC). However, federal Regulation CC permits an extension of the UCC midnight deadline under certain circumstances. A paying bank may send the returned check directly to the depository bank by…
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We have a potential business customer that would like to set up a deposit account and line of credit. The company sells point of sale (POS) solutions for businesses, by providing equipment for processing POS transactions (they use a third-party vendor to process the transactions). They employ several salespeople in many different states to sell this equipment, and they want to deposit checks by having salespeople take pictures of their checks on their phones and send them to the business owner, who would use our consumer mobile remote deposit capture (RDC) system to deposit the checks, rather than our business RDC system. What are the risks of allowing a customer to use RDC to deposit copies of checks? Does the restrictive endorsement “for mobile banking deposit only” provide sufficient protections?
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Based on the information provided, it is likely that this customer’s deposit methods will increase the risk of fraud. However, it may be possible to reduce the risk of fraud by requiring the customer’s salespeople to apply a restrictive endorsement on the checks before forwarding photos of the checks to the customer’s owner for deposit.…
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We have a business customer that acts as a payment processor for other companies. They create remotely created checks and deposit them with our bank via remote deposit capture at their place of business. Recently, the number of returned items has increased massively, and we wish to terminate the relationship. We would like to determine the best time to terminate the relationship. What are the timeframes in which we would be liable as the depositing bank for returns through cash letters, adjustments with entry, and incoming collection claims without entry?
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In our view, your bank could be liable for unauthorized remotely-created checks (RCCs) for at least one year from the date of the account closing (or freezing). If your bank terminated or froze the customer’s account today, paying banks would have one year from today to bring claims for violations of the RCC warranties in…
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The Official Interpretations for Regulation E note that an unauthorized electronic fund transfer (EFT) includes a transfer made by a consumer at an ATM who was “induced by force to initiate the transfer.” Does similar logic apply when other types of electronic payments are initiated by threat or force? For example, would a customer held at gunpoint and forced to make an EFT using a mobile payment app (such as Venmo) be considered unauthorized?
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In our view, an electronic payment initiated by a consumer through a third-party mobile app like Venmo under threat or force technically would not be considered an “unauthorized transaction.” However, while a consumer may not be eligible for a legally mandated reimbursement for such a transaction, your bank could voluntarily reimburse the customer based on…
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One of our commercial customers had several forged checks drawn on their account. One check was written on June 8. The check cleared our bank on June 13. The customer received a statement showing the check on June 30, and they notified us that the check was fraudulent on July 10. We returned the check to the depository bank (a credit union) on that day. The credit union submitted a late return claim to the Fed, which initially credited the credit union but reversed the credit after we submitted documentation. The credit union claims that we made a late return under Section 4-302 of the Uniform Commercial Code (UCC).
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We believe that the credit union is correct that the check was a late return under the Uniform Commercial Code (UCC), because your bank returned the check after the midnight deadline. As we understand the Fed’s process for late returns, it would have revoked its credit to the credit union if it could not obtain…
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We are merging with another bank, and they provide a form letter for customers to use when reporting unauthorized card transactions under Regulation E. The letter states that if a customer reports an unauthorized transaction that the bank finds to have been initiated by the customer, the bank will charge a service fee for each disputed transaction. Can that be done?
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Yes, we believe that your bank may charge a service fee for investigating a customer’s notice of error, provided that your bank has determined that no error occurred. Regulation E prohibits banks from charging a fee for “any aspect of the error-resolution process” if a billing error occurred. But if there has been no billing…
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We sometimes process withdrawal tickets without a customer’s signature. They instead are filled out by a banker and state “Per (Banker Name)” or “Per Phone Conversation” on the signature line. In some cases, the teller makes out a cashier’s check for the withdrawal, and in other cases, the teller withdraws cash, and the cash sits at the bank until the customer comes in. Should we be accepting these withdrawal tickets?
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We are not aware of any law or regulation prohibiting this practice, but there is a risk a customer could claim that a withdrawal ticket was unauthorized and demand a refund. If your bank does not have a written request corresponding with these withdrawal tickets, it may be difficult to prove that they were authorized…
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A customer deposited a large insurance proceeds check made payable to both our customer and his mortgagee bank (together, not alternatively). However, the check was missing the required mortgagee bank’s endorsement, and we are now concerned about fraud. Can we freeze the customer’s account while we investigate?
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Your bank may freeze the customer’s account to investigate suspected fraud associated with the account, provided your account agreement includes language effectively authorizing the bank to place a hold on the account’s funds when it is concerned about potential fraud. In general, your bank’s authority to freeze your customer’s account is governed by your account…