Ask Mary: UCC4A

Dear Mary: What are my financial institution's responsibilities under UCC4A?

Uniform Commercial Code 4A (UCC4A) was developed to establish a comprehensive body of law applicable to wholesale funds transfers. Prior to UCC4A, the rights and liabilities of participants in funds transfers were uncertain, and the outcome of claims was unpredictable, due to lack of agreements or agreements without disputes addressed. The Uniform Commercial Code is a set of laws that provide legal results and regulation governing commercial or business dealing and transactions. The code has the effect of law only when it is adopted by a state. A form of UCC4A has been adopted by all states.

UCC4A applies to credit transfers, including those transmitted via CHIPS, Fedwire and ACH. Consumer electronic funds transfers covered by the Electronic Funds Transfer ACT (EFTA) are excluded from coverage under Article 4A. Generally, Article 4A applies only to wholesale credits. Wholesale credits are typically larger dollar payments transmitted by commercial entities. If a consumer credit transfer is not covered by the EFTA then it is subject the 4A, meaning they are covered by agreement.
Items that cannot be altered by agreement include:

  • the obligation to transmit all entries it accepts,
  • pay interest on entries delayed or not transmitted,
  • company obligation to pay financial institution for entries properly transmitted,
  • proper settlement of “on-us” transactions, financial institution liability for errors it may make, or
  • liability for not following agreed upon commercially reasonable security procedures.

Items that CAN be altered by agreement include:

  • ability to refuse entries,
  • notice of rejected entries,
  • cancellation, withdrawal or amendment of entries after acceptance,
  • company obligation to inform financial institution of errors transmitted within 90 days,
  • reimbursement for errors for one year following company receipt of sufficient notice to determine error, or
  • choice of law (which adopted state version of UCC4A the financial institution uses).

What does all this really mean? As a financial institution, your agreement with your business account holder is key to how you handle the relationship and what each parties’ obligations are.