By Leslie Callaway, CRCM, CAFP
Q/ My bank returned a large dollar check that the bank had paid in mid-November 2023 to the bank of deposit after determining that it was altered/fictitious, but it was denied as a late return. My bank then provided a letter of indemnification with another request for return of the funds. The bank of deposit responded that there are no funds to send back. Is there another option my bank can pursue?
A/ Although bankers sometimes use the term “altered/fictitious” to capture checks that have been returned for a variety of reasons, the rules about returns for altered checks and counterfeit (fictitious) checks are different. Most important, the midnight deadline for “returns” applies to counterfeit checks and other checks with a forged maker signature but not to altered checks, which are subject to warranty claims that allow more time for a paying bank to make a claim.
Thus, the bank must first determine whether the check was altered or a counterfeit.
You can find more detail in a recent check fraud ABA staff analysis, but in brief:
- Altered: If the item was altered, the paying bank has a warranty breach claim which it must pursue directly with the bank of deposit (as you have already done). How long the bank has to file a claim will depend on state law, but it is longer than the midnight deadline and is usually at least one year. If the check is altered and a claim is timely, it does not matter whether there are funds in the account where it was deposited: the bank of deposit has breached its warranty that the check was not altered. If helpful, you may consult ABA’s check Fraud Claim Directory at aba.com/checkfrauddirectory to determine whether the bank has identified a contact for check claim inquiries.
- Counterfeit/forged maker signature: If, as the bank of deposit seems to assume, the check is a counterfeit (fictitious), the midnight deadline rule applies, and the return was late, so the bank of deposit is under no obligation to return funds. The bank of deposit might be invoking ECCHO’s Rule 9, which allows the paying bank to return a counterfeit or other forged maker signature after the midnight deadline (but within a specified timeframe), but the bank of deposit must pay only if there are funds still in the account sufficient to cover the full amount of the claim.
Sometimes it is not clear whether a check is altered or counterfeit. Accordingly, Regulation CC (Expedited Funds Availability Act) provides that if there is a dispute about whether the check is altered or counterfeit and there is no paper check, there is a rebuttable presumption that the check is altered. Therefore, if you believe the check was altered and the bank of deposit believes the check was counterfeit, the bank of deposit has the burden of showing that the check was counterfeit. (Answer provided March 2024.)
Q/ My bank is considering allowing customers to have early funds availability for their direct deposits (ACH deposits). The bank will make direct deposited funds available in customers’ accounts as soon as it receives information from a payor about the incoming deposits, rather than wait for the funds to post before making them available. While most customers will still have same-day or next-day availability, customers eligible for this program will have their deposits available up to two days earlier than the bank’s funds availability policy states. Because this is a positive change, does the bank need to notify all customers?
A/ Yes, though advance notice is not required. Under §229.18(e) of Regulation CC (Expedited Funds Availability Act), when a change in the bank’s funds availability police expedites the availability of deposited funds, banks must send a notice of a change in the bank’s funds availability policy no later than 30 days after the change. Advance notice of a change is required if the change does not involve expediting the availability of funds. Note, however, that the notice requirements apply to consumer customers only. Notification to commercial customers is optional. (Answer provided March 2024.)
Q/ Is flood insurance required for a loan when the property securing the loan or being purchased with the loan is located in a non-participating community?
A/ No, but it may be prudent to do so. If the community does not participate in the National Flood Insurance Program, flood insurance is not required, but the bank must still provide the notice to the borrower. Additionally, the bank must review the requirements of any secondary market investors if it intends to sell the loan.
See Applicability 1 and Mandatory 2 from the Interagency Questions and Answers Regarding Flood Insurance. (Answer provided March 2024.)
Answers are provided by Leslie T. Callaway, CRCM, CAFP, senior director, compliance outreach and development at ABA. Answers do not provide, nor are they substitutes for, professional legal advice.
