The National Check Fraud Center has a no-nonsense, word-dense list of 20 UCC Provisions Every Banker Should Know. Go “check” out that link – – looks pretty daunting, doesn’t it?
Author Mary Beth Guard manages to keep it light, though, even in some of the longer explanations:
- Section 4-209: Are you familiar with the encoding warranty? A person who encodes information on or with respect to an item after the item is issued warrants to any subsequent collecting bank and to the payor bank or other payor that the information is correctly encoded. If the customer of a depositary bank encodes, that bank also makes the warranty. (Note, although we don’t encode amounts on checks anymore, the valid amount requirements still apply.)
Keep this warranty in mind if you are allowing one of your business customers (like a large department store) to encode checks it receives. Let’s look at what could happen with this warranty. John writes a check to Phoebe for $6,000. Phoebe deposits it into her bank. Her bank encodes the amount as $60,000 and credits her account for that much. Phoebe calls the bank’s data line and believes that she has found her pot of gold! She doesn’t know where the money came from and isn’t about to ask any questions. She withdraws all the funds and moves to an exotic island, never to be heard from again. In the meantime, John’s checks start bouncing. Upon investigation, he discovers that the check he wrote to Phoebe was paid for the wrong amount. He complains to his bank. Since the check was only properly payable for its actual amount, his bank must recredit his account for the difference between the real amount ($6,000) and the amount wrongly encoded ($60,000). His bank then goes against the encoding bank under a breach of warranty theory. Unfortunately, the encoding bank will have a hard time passing the loss on, since Phoebe is long gone with the money. The moral of the story? Make sure amounts are correct…
The list is from 1994, but the provisions and warnings remain valid. It’s a relief that recognition and image analysis technologies have leapt forward! To address this scenario, banks can validate amounts that are both incoming and outgoing with Anywhere Validate.
Fast forward to 2018…With the July 1, 2018, Regulation CC Amendments now active, financial institutions offering remote deposit capture (RDC) and mobile remote deposit capture (MRDC) can better protect themselves and their clients from duplicate item indemnity claims by requiring and validating the presence of a restrictive endorsement consistent with an RDC or MRDC deposit.
These Reg CC rule changes generated bank interest for new Restrictive Endorsement Validation capabilities (REE) . Additionally, financial institutions want to utilize REE to stop teller and ATM check deposits which include RDC or MRDC endorsements.