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Who's on the Hook for That Check?

Amy Donaghue

By: Christine Harris, AAP, APRP, NCP, Manager, Member Support

Although there have been predictions for years that checks will become the T-Rex of the payments landscape, they seem to be an unshakable aspect of the payments industry. But of course, when you have checks (or anything that has a dollar value) you have fraud, and with fraud comes confusion about what steps a financial institution can take to protect themselves or to recover losses.

Before we start talking scenarios, let’s review a very basic, very important, but often misunderstood fact about check returns. All check returns must be processed within 24 hours from the time the check was presented to the Paying Bank. That’s right – no matter why you need to return a check, you only have 24 hours to do so. After that, you may have options through the Adjustments process or the Breach of Warranty process, depending on timing and the circumstances. Just remember, you only have 24 hours from presentment to return the check.

In this article, we’re going to discuss situations in which financial institutions may file a Breach of Warranty claim directly with the Depository Bank (BOFD) when outside of the return or adjustment timeframe.

We often receive calls from members with “fraudulent” check situations. There are many different reasons a check could be considered “fraudulent,” and it’s important to understand who the players in the transaction are, and what exactly is fraudulent before we can proceed with who is responsible. So, let’s look at some of the more common scenarios we hear about from our members.

Forged/Missing/Incorrect Endorsement

Everything about the signature on the back of the check (AKA the endorsement) is warranted by the depository institution. If the signature is not valid (is not the signature of the payee), or the named payee of the check did not benefit from the item, the BOFD is on the hook. As a result, the BOFD may or may not be able to recoup the funds from their account holder, depending on the terms of their account agreement.

Here’s an example: An insurance company issues a check payable to John and Jane Doe AND Phil's Auto Body Shop. John and Jane endorse the check and deposit it into their joint account. A month later the Auto Body Shop calls the insurance company saying they never received payment for the repairs to the Doe's car. After investigating, the insurance company realizes that only John and Jane endorsed the check, so they ask their financial institution to return the check to get the proper endorsement. The financial institution is past the point of return, so they send a breach of warranty to the BOFD on the Missing/Incorrect Endorsement.

Forged Signature

Now we move to the front of the check. Let’s say that a client with Bank ABC had some checks stolen. The checks cleared the client’s account, and a week later they notice them and notify Bank ABC that they did not write these checks. The paying bank warrants that the signature on the front of the check is valid (harkening back to the days when a bank could – and sometimes did – verify the signature on the check against a signature card). Since it is past the 24-hour return window, and since they warrant the signature, the paying bank has no recourse against the BOFD in this situation. They can look to their account agreement to see if they have requirements for the timing of notification from their client, and possibly can push the loss back to the client. They can also take legal action against the forger (if they can determine who that might be) but otherwise, the loss will fall to the paying institution.

Altered Check

This category often causes extra confusion in the check world because there is a return reason code called “Altered/Fictitious,” so this might lead people to believe that those two things are one and the same. But they are very different after you have passed the 24-hour return window. A fictitious item is a counterfeit item (more below) and is not warranted by the depository institution. However, an altered item is, so let’s see how that plays out.

A client writes a check to Bob Jones for $50. Before cashing the check, Bob changes the courtesy amount to $500. This check has been altered. Or a client mails a check to Sally Smith for $100, and a fraudster steals the check from the mail, washes out the payee and dollar amount, changes them to her name and changes the amount to $1,000. This check has also been altered. In both instances, the paying bank can file a Breach of Warranty claim against the depository institution to recoup the money.

Counterfeit Check

In these situations, a fraudster has managed to get account information from a financial institution client and has used that information (routing number, account number, name, address, etc.) to create a bogus check. When this check clears the client’s account, it will usually be out of the check number range, which may be the first red flag for the paying institution. As was the case with forged signatures, once the 24-hour return window has passed, the paying bank warrants these situations. They would again look to their account agreement to see if the client was within the allotted timeframe to notify the institution and, if not, can pass the loss to the client. If the financial institution takes the loss, they have the option to pursue the counterfeiter legally.

The next time you face a situation with a fraudulent check, take some time to review who the players are to help determine what steps you may be able to take. There are also situations that can be resolved with adjustments through the Federal Reserve/ECCHO, but that’s a discussion for another day! And always remember to reach out to your friends at EPCOR via phone (800.500.0100), email (memserve@epcor.org) or website chat (epcor.org) if you need help sorting through the particulars.

Still Learning the Check Basics?

Join us for Check Day Camp and you’ll be a “checks-pert” in no time! With two virtual offerings, in June and November, this event will kick start your journey in the check world and build a solid foundation that will support you throughout your career as a payments professional. Our accredited trainers will pass down their knowledge and teach check newbies and anyone who needs a better understanding of check basics including check rules, exception handling and risk management. Register now!