Topic: Uniform Commercial Code
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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…
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What is our liability if we allow a non-customer to deposit a check into a customer’s account? One example of this situation occurs when a non-customer is a tenant of a customer and wishes to deposit a rent check into the customer’s account. In such a case, we would stamp the check and deposit it without the customer’s indorsement.
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We do not recommend depositing a check into your customer’s account without their knowledge and indorsement. Under the Uniform Commercial Code (UCC), your bank could be liable under its presentment warranties to the payor bank (the non-customer’s bank). When forwarding the check to the payor bank for payment, your bank is warranting that there are…
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Are there any Illinois or federal regulations that require us to cash checks drawn on our bank for noncustomers?
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No, we are not aware of any law that would require you to cash a check drawn on your bank when the check is presented by a noncustomer. However, you should review your account agreements to ensure that the bank has not directly or indirectly agreed to cash checks drawn by your customers and presented…
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What, if any, Illinois laws would apply to the bank selling repossessed property — particularly vehicles? Additionally, would you recommend that we have some sort of agreement that indicates the vehicle is being sold as-is without any warranty?
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The Illinois Uniform Commercial Code (UCC) governs most aspects of a sale of repossessed loan collateral. For sales of repossessed automobiles, certain provisions in the Illinois Vehicle Code and Secretary of State’s administrative rules also would apply if your bank does not have an assignment of the vehicle’s title by the owner. A sampling of…
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If we have charged off and closed an account, can we re-open the account to use a direct deposit (a non-government deposit) to offset the amount of the charge off?
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No, we do not believe that your bank may re-open the account to exercise a right of setoff in this situation. While your deposit account agreement likely provided for a right of setoff relative to funds your former customer had on deposit, that customer no longer has a deposit account or funds on deposit, precluding…
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We have several questions about completing a “Notice to Buyer of Security Interest in Farm Products” form. Should we use a social security number or EIN as the taxpayer identification number, and should we enter most of that number as Xs? When describing the property, can we enter “all crops” or “all property”? Can the amount of the covered products be listed as “unlimited”? Should we refile this document annually?
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To ensure that the grain sale proceeds are made payable to your bank, you should follow the disclosure procedures in the Food Security Act and the Illinois UCC for this notice. Both federal and Illinois law requires lenders to provide a statutory notice to buyers of farm products in order to preserve their liens on…
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A former business customer has a loan that has been charged off. An ACH credit transaction came in this morning to the customer’s old business checking account, which is now closed. Can we use the ACH payment to offset the charged off loan? Or do we have to return the payment? The transaction was a corporate credit entry (“CCD”). The business customer’s checking account was closed at our request as part of the workout regarding the overdue loan. The business customer has been dissolved and no longer exists.
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No, we do not believe that your bank may exercise a right of setoff in this situation. While your deposit account agreement and your loan agreement likely both provided for a right of setoff relative to funds your former customer had on deposit, that customer no longer has funds on deposit, precluding a right of…
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Is there a deadline for collecting on a charged off account? A customer whose overdrawn account was charged off ten years ago has now opened a new account. We never sent the old debt to a collection agency or obtained judgment against the debtor. Can we collect on it now?
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We recommend consulting with bank counsel, but in our view, any applicable statute of limitations governing your ability to collect the debt likely has expired or is about to expire. Under Illinois law, different statutes of limitations apply depending on the basis for collecting on the debt. For example, actions to collect debts based on…
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Can we disburse new funds on a closed-end commercial loan through a loan modification? For example, if a commercial customer has secured a $100,000 loan and pays down $20,000, can that customer later receive another $10,000 disbursement on the same loan through a modification?
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We are not aware of any laws that would prohibit modifying a commercial loan to allow for additional disbursements, but we recommend consulting with bank counsel to address certain risks created by this type of modification. At the outset, it would be prudent to ensure that either your original security agreement or your modification documents…
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When a customer withdraws funds by check, we require that the check be made payable to “cash” or to the individual who is withdrawing the funds, but we won’t cash a check made payable to our bank’s name (except for loan repayments and safe deposit box payments). Do you have any guidance to support why our policy is appropriate?
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Yes, Illinois law supports your bank’s policy regarding checks that are made payable to the bank. Under Illinois law, if a check is made payable to a bank and is presented to that bank, Illinois courts have found that the bank has a duty to negotiate the check according to the account owner’s wishes (because…