Topic: Fraud
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We have a credit card program for which we currently do not impose daily spending limits, fallback limits, or holds on ACH payments. As a fraud prevention measure, we would like to impose these limits and holds. Do we need to disclose these changes to our existing cardholders? If so, how much notice do we need to give cardholders prior to making the change?
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We are not aware of any laws or regulations that expressly require prior disclosures of the changes in terms you have described. However, we recommend disclosing these changes to existing cardholders at least 45 days before imposing them. Both the Truth-in-Lending Act and Illinois law require 45 days’ notice before the effective date of various…
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We have a customer with a home equity line of credit (HELOC) at our bank who believes that there has been fraudulent activity on his account. The customer said that a fraudulent check was drawn on the HELOC and paid to another bank. Do we have a permissible purpose to pull this customer’s credit report — without obtaining his permission — to determine if there has been any fraud on the account? Can we pull the credit report if the customer does grant permission?
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Yes, we believe you have a permissible purpose under the Fair Credit Reporting Act (FCRA) to pull the customer’s credit report without his permission in this situation. You also may pull a credit report with the customer’s written permission. The FCRA permits a bank to obtain an individual’s credit report in limited circumstances, including for…
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A business recently opened a deposit account and deposited what we later learned was a stolen check for over $150,000. Within two weeks, the customer withdrew most of the deposited money. We now have learned that the individual who opened the account used a forged ID, and the deposited check had been stolen from a lockbox owned by a legitimate business in Missouri. The check was a legitimate check made payable to the legitimate business; the fraudster forged the endorsement when depositing it at our bank. Are we liable to the payor bank for the entire loss?
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Yes, as the depository bank, your bank likely is liable to the payor bank for its entire loss. The Uniform Commercial Code (UCC) places the ultimate risk of loss for the payment of a check with a missing or unauthorized endorsement on the depository bank. Under the UCC, a depository bank warrants to the payor…
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A customer discovered that her daughter stole a box of checks and used them at a local grocery store. The checks were converted into back office conversion (BOC) ACH entries. Can we return these as unauthorized transactions, using NACHA reason code R10, since the grocery store did not validate the customer’s identification when accepting the checks? Do we have 60 days since settlement to return the transactions?
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Yes, we believe that the NACHA Operating Rules and Guidelines permit your institution to return the BOC transactions under Return Reason Code R10 as unauthorized entries. Your bank should follow the same procedures it would for other returns under code R10, such as obtaining a written statement of unauthorized debit (WSUD) from your customer. The…
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Are we authorized to put a stop payment on a cashier’s check payable by our bank that has not yet been submitted for payment? We discovered that one of our customers had purchased the cashier’s check as the result of a scam.
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No, we do not believe that your bank may stop payment on the cashier’s check without risking liability for the check. The Illinois Supreme Court has held that a cashier’s check is the equivalent of cash. As a general rule, once a cashier’s check enters the stream of commerce, the issuer (your bank) is liable…
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If a customer reports a fraudulent check after receiving their statement, is it true that we have only 24 hours to return the check after receiving it, regardless of the fraud?
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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). Although federal Regulation CC permits certain limited extensions of the UCC midnight deadline rule, they almost certainly are unavailable when the fraud is not discovered until after the customer…
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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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One of our customers lost her checkbook, and checks drawn on our bank were forged. The depositary bank already has cashed the checks. Are we liable for the forgeries?
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In general, your bank (the bank on which the forged checks were drawn) is liable for any forged checks that it did not return before its midnight deadline, but your bank may have a few narrow defenses against liability. In the context of a forgery, you will need to reimburse the customer for the amount…
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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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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…