Subpart C Flashcards
What does Subpart C of the collection process cover?
Requirements for each bank in the collection process and specific warranties
Includes guidelines for handling checks and electronic checks
Are electronic checks treated the same as paper checks under Subpart C?
Yes, unless paper check or paper returned check is specified
Electronic checks are subject to the same collection process as paper checks
What is required if a bank must provide information in writing?
It may provide the information electronically if the receiving bank agrees
This allows for flexibility in communication methods
What must a paying bank do when it decides not to pay a check?
Return the check in an expeditious manner
Must ensure the depositary bank receives it by 2:00 p.m. on the second business day
What must a paying bank indicate on the front of a returned check?
That it is a return and the reason for return
This is crucial for clear communication and record-keeping
What must a paying bank include when returning a substitute check or electronic returned check?
Information that would be retained on any subsequent substitute check
Ensures traceability and proper documentation
What can a paying bank do if the check is unavailable for return?
Provide a notice in lieu of return
This serves as an alternative notification method
What is the definition of ‘expeditious return requirements’?
Return of checks must be done such that the depositary bank receives them promptly
Specifically, by 2:00 p.m. on the second business day
What happens if a paying bank cannot identify the depositary bank?
It may send the returned check to any bank that handled the check for forward collection
The paying bank must advise that it cannot identify the depositary bank
What is required to be sent when a check is returned?
Sufficient copy of the front and back of returned check
This ensures that the necessary documentation is provided for record-keeping and processing.
What must a written notice of nonpayment contain?
Information from the check’s MICR line, name of payee(s), amount, date of depositary bank indorsement, bank name, routing number, trace or sequence number, reason for nonpayment
This information helps identify the check and the basis for the nonpayment.
What is a ‘sorry’ document in this context?
May refer to a notice of nonpayment
This term indicates a document that communicates the nonpayment status of a check.
What is the deadline for a paying bank to provide notice of nonpayment for checks $5,000 or more?
By 2:00 p.m. (local time) on the second business day following the banking day on which check was presented
This requirement ensures timely communication regarding nonpayment.
True or False: The paying bank warrants that if notice in lieu of return is sent, the check has not been returned.
True
This warranty is important as it protects the interests of the parties involved.
What does reliance on routing number allow the paying bank to do?
Return a check based on any routing number designating depositary bank appearing on returned check
This allows for flexibility in processing returned checks.
What must the depositary bank prove if a claim for late return is asserted?
That arrangements for receiving returns are commercially reasonable
This places the burden of proof on the depositary bank in disputes over late returns.
Fill in the blank: Acceptance of electronic returned checks and electronic notices of nonpayment is done by agreement with the _______.
[transferor bank]
This agreement is necessary for the legitimacy of electronic transactions.
What is required for the returning bank regarding checks?
Same requirements for expeditious return as the paying bank
This ensures consistency in the handling of returned checks.
What is the responsibility of the depositary bank in relation to unidentifiable checks?
Same requirements/process for unidentifiable depositary bank
This ensures that all checks are handled appropriately, even if they cannot be easily identified.
What must be included in the notice of nonpayment from the paying bank?
Information from the check’s MICR line when received, name of payee(s), amount, date of depositary bank indorsement, bank name, routing number, trace or sequence number, reason for nonpayment
This information is critical for accurate processing and accountability.
What must a bank do upon receiving a returned check?
Send the returned check or notice directly to the depositary bank or to a returning bank agreeing to handle the returned check
This ensures proper processing of the returned item.
When must payment be made to the returning or paying bank for a check?
Prior to the close of business on the banking day on which the check was received
This is crucial for timely processing.
What is required for payment to be considered final?
Payments are final when made
This indicates that once a payment is processed, it cannot be reversed.
What must a depositary bank not impose when accepting returned checks?
A charge for accepting and paying checks being returned to it
This protects customers from additional fees.
By when must a depositary bank notify its customer of a returned check?
By midnight of the banking day following the banking day on which it received the returned check or notice
This ensures timely communication with the customer.
What warranties do banks provide when transferring or presenting an electronic check?
- Electronic image accurately represents all information on front and back of original check at time of truncation
- Electronic information includes an accurate record of all MICR line information required for substitute check and amount of the check
- No person will be charged for an electronic check or electronic returned check that has already been paid
These warranties ensure the integrity and accuracy of electronic transactions.
True or False: A bank may charge a customer for a duplicate electronic check.
False
This is known as the no double-debit or no duplicates warranty.
What must a bank do if it receives an oral notice of nonpayment?
Accept the oral notice of nonpayment during its banking day
This facilitates communication regarding payment issues.
What is the method of debiting the settlement account of the depositary bank?
By cash, wire transfer, or any other form of payment acceptable to returning or paying bank
This allows flexibility in payment methods.
Who do the warranties extend to when transferring for collection?
- Transferee bank
- Any subsequent collecting bank
- The paying bank
- The drawer
This ensures all parties involved are protected.
Who do the warranties extend to when transferring for return?
- Transferee returning bank
- Any subsequent returning bank
- The depositary bank
- The primer
This ensures all parties involved in the return process are covered.
What does a bank warrant when it transfers or presents a remotely created check?
The bank warrants that the person whose account the check is drawn on authorized the issuance of the check, the amount stated on the check, and the payee stated on the check.
Under what condition can a warranting bank defend against a claim for breach of warranty?
The warranting bank may defend by proving that the paying bank’s customer is precluded from asserting the claim under UCC 4-406.
What does the warranty of settlement amount include?
Each bank that presents checks warrants that the total amount of checks presented is equal to the total amount of settlement demanded by the presenting bank.
What information must accompany checks during transfer or presentation?
Accompanying information must accurately indicate the total amount of checks or returned checks transferred.
What does the encoding warranty ensure?
The encoding warranty ensures that information encoded after issue regarding the check or returned check is accurate.
What is included in the MICR line of a paper check?
The MICR line includes any information placed in the line that could be encoded, such as the check number and account number.
What can a settling bank do if the settlement amount exceeds the total amount of checks?
The settling bank may offset the excess settlement amount against future or subsequent settlements.
What warranties are associated with returned checks?
- The paying bank or returning bank warrants that:
- It returned the check within its UCC midnight deadline
- It is authorized to return the check
- The check has not been materially altered
- For notice in lieu of return, the check has not and will not be returned.
What does the warranty regarding notice of nonpayment include?
- The paying bank warrants that:
- The check is returned or will be returned within the UCC midnight deadline
- It is authorized to send the notice
- The check has not been materially altered.
Fill in the blank: Each bank that presents or transfers a check or returned check warrants that the information encoded after issue is _______.
[accurate]
What is the purpose of indemnity in banking?
Indemnity provides security or protection against losses.
What is Remote Deposit Capture (RDC)?
RDC involves accepting a deposit of an electronic image or other electronic information related to the original check.
True or False: An indemnity claim can be made if the original check had a restrictive indorsement inconsistent with the means of deposit.
False
What does a truncating bank do?
It accepts a deposit of an electronic image or other electronic information related to the original check.
Fill in the blank: Indemnity is provided to the depositary bank that accepted the original check and incurred a loss if the loss is due to the check having already been ______.
paid
What happens if a paper deposit bank accepted a check with a restrictive indorsement inconsistent with the means of deposit?
It may not make an indemnity claim.
What is the relationship between indemnity and electronically-created items (ECI)?
Indemnity is provided for each bank that transfers or presents an ECI and receives a settlement or consideration for it.
Who is indemnified against losses due to an ECI?
Transferee bank(s), any subsequent collecting bank, the paying bank, and any subsequent returning bank.
What are the potential causes for losses related to an ECI?
Electronic image is not derived from a paper check; unauthorized issuance of the item; charged for an ECI already paid.
What is the maximum amount for damages for breach of warranties?
Shall not exceed amount of item plus interest compensation and expenses.
Fill in the blank: The amount of damages for RDC Indemnity or ECI Indemnity claims shall not exceed the sum of the indemnified bank’s loss, up to amount of ______ received by the indemnifying bank.
settlement or other consideration
What additional rights may a bank have under indemnity claims?
Other rights under UCC or applicable state or federal law.
What must a notice of claim be made within?
30 days after claimant has reason to know of breach and identity of warranting bank
Failure to provide timely notice can discharge the warranting bank to the extent of any loss caused by the delay.
What is the liability of a bank handling a check for forward collection?
Liable to any bank that subsequently handles the check to the extent that the subsequent bank does not receive payment for the check
This applies whether or not a bank has placed its indorsement on the check.
What must a bank do with a check during forward collection or return?
Indorse the check in a manner that permits interpretation and in accordance with ANSI standards
Standards include ANSI X9.100-111, ANSI X9.100-140, and ANSI X9.100-187.
What is the American National Standards Institute (ANSI) standard for check endorsement?
ANSI X9.100-111 Check Endorsement Standard
This standard is used for both paper checks and electronic overlay images.
What happens after a check is indorsed by a bank?
Only the bank may acquire the rights of a holder until the check has been returned or specifically indorsed to a non-bank entity
This means the bank retains rights until certain conditions are met.
What must a bank avoid when applying another bank’s indorsement as depositary bank indorsement?
Must avoid area reserved for depositary bank indorsement as specified in the indorsement standard applicable to the check
This is crucial for compliance with indorsement standards.
When is a paper check considered received by the paying bank?
When it is received at the location to which delivery is requested or the address of the bank associated with the routing number on the check
This defines the point of receipt for processing purposes.
Fill in the blank: A warranting bank is discharged to the extent of any loss caused by the delay in giving _______.
notice of the claim
Timely notification is critical for the bank’s liability.
True or False: A bank that accepts an item for collection can collect from a non-bank entity.
False
The bank is the holder of the item and may not collect directly from a non-bank entity.
What is the role of a depositary bank in relation to another bank’s indorsement?
Considered the depositary bank for purposes of Subpart C
This applies in centralized return environments.
What standard governs the terms under which a paying bank will accept presentment of an electronic check?
Governed by agreement
This is critical in electronic check processing.
What is the liability of a bank during forward collection?
Settlement between banks for forward collection of a check is final when made
Collecting bank may be liable to a prior collecting bank, including the depositary bank and the depositary bank’s customer.
What must a paying bank do when a paper check is presented for same-day settlement?
Must settle for or return the check if presented by 8 a.m. on a business day at a designated location
Paper checks must be separated from other forward-collection checks or returned checks.
What happens if the presentment of a paper check meets the established requirements?
Paying bank is accountable to presenting bank for the amount of the check unless it settles or returns the check by close of Fedwire on the business day
Settlement can be by credit to an account at a FRB designated by the presenting bank.
What can vary the effect of provisions of Subpart C?
Provisions may be varied by agreement, except for disclaiming responsibility for lack of good faith or failure to exercise ordinary care
Agreements cannot absolve a bank of its own negligence.
What standard of care must a bank exercise under Subpart C?
Must exercise ordinary care and act in good faith
Failure may result in liability to the depositary bank, depositary bank’s customer, owner of a check, or another party.
What is the measure of damages for failure to exercise ordinary care?
Amount of the loss incurred, up to the amount of the check, reduced by loss that would have occurred even if bank had exercised ordinary care
This emphasizes the importance of due diligence in check processing.
What is the measure of damages for failure to act in good faith?
May be liable for consequential damages
This reflects the serious implications of acting in bad faith.
What is the consequence of a paying bank’s failure to make timely return?
Liable under either the expeditious return requirements or the deadline for return under UCC, but not both
This creates a clear framework for liability in case of delays.
What is comparative negligence in the context of banking liability?
Not defined in the provided text
Typically refers to the allocation of fault among parties involved in a dispute.
Fill in the blank: A collecting bank handling a check for forward collection may be liable to a _______.
[prior collecting bank]
This includes the depositary bank and the depositary bank’s customer.
What happens if a person fails to exercise ordinary care in indorsing a check?
Damages incurred may be diminished in proportion to the amount of negligence or bad faith attributable to that person.
What is the presumption of alteration in disputes between banks?
The presumption applies to whether a substitute check or electronic check contains an alteration or is derived from an original check with an unauthorized drawer signature.
How can the presumption of alteration be overcome?
By proving by a preponderance of evidence to the contrary.
What happens if the original check is made available for examination by all banks involved in the dispute?
The presumption of alteration would no longer apply.
Do the provisions regarding presumption of alteration alter UCC transfer and presentment warranties?
No, they do not alter UCC transfer and presentment warranties that allocate liability for altered items or items issued with an unauthorized signature.
What do the provisions of Subpart C supersede?
They supersede UCC as adopted in any state or any other state law, but only to the extent of the inconsistency.
Which exclusions apply to Subpart C regarding expeditious return and notice of nonpayment?
They do not apply to checks drawn upon the United States Treasury, checks drawn on a state or local government that is not payable, or U.S. Postal Service money orders.
Fill in the blank: The presumption of alteration applies in the absence of other _______.
[Federal statute or regulation]
True or False: The provisions of Subpart C apply universally to all checks without exclusions.
False
What sections of the UCC are referenced for details on alteration and unauthorized signatures?
UCC §3-407, UCC §1-201, and UCC §3-403.
