Can we offer a "free" checking account, but then charge noncustomers to cash checks written from the "free" account?

Reg DD merely says you can't advertise an account as free if you charge any maintenance or activity fees in connection with the account. The Commentary to Section 230.8 says, in pertinent part:

i. Any fee imposed when a minimum balance requirement is not met, or when consumers exceed a specified number of transactions
ii. Transaction and service fees that consumers reasonably expect to be imposed on a regular basis
iii. A flat fee, such as a monthly service fee
iv. Fees imposed to deposit, withdraw, or transfer funds, including per-check or per-transaction charges (for example, $.25 for each withdrawal, whether by check or in person)
4. Other fees. Examples of fees that are not maintenance or activity

It doesn't expressly address a fee for "cashing a check", but I think an examiner could argue that such a fee is like a fee for making a withdrawal.

Anybody had any experience with this?

I thought the commentary addressed fees imposed against the accountholder. I took Anonymous' scenario as follows:

I'm the accountholder and I have their 'free' account. I write Mary Beth a check for $50. She tries to cash it at Anonymous' bank, because it's an on-us item. Anonymous charges her a nickel because Mary Beth isn't a customer.

I don't think that activity affects Anonymous' ability to advertise the account as 'free', because I didn't get the charge.

Wow! I think you read it right and I did not. And I agree that in that scenario, the fact that the institution will charge me a fee (as a noncustomer) for cashing a check written to me by you (the holder of a "free" account) does not pose a problem. It's still a free account.

Can we charge a fee to non-customers cashing on-us checks? The non-customer is presenting the item to us directly for payment, and it is our obligation as the paying bank to pay the item (assuming it's properly payable) so I do not see how we could get away with that.

I'm so glad you asked that. We've just created a new subsection for Court Watch called "Cases in the News". One of the cases in the news involves an issue relating to charging fees to noncustomers to cash checks drawn on-us.

There was an Illinois case back in 1986 (see the Related Links in Cases in the News for details) that said you couldn't, but it was based upon an old version of a section in the Illinois UCC. The current thinking is that you can, but the issue isn't totally settled yet.


For information about the issue, go to Court Watch and click on "Cases in the News". One of the related links you'll find there is to a Consumer Union report on noncustomer check cashing fees. It even includes details from a recent survey they did on who is charging the fees and what amounts they are charging.

Texas passed a law last year requiring banks to pay on-us checks with sufficient balances "at par." Five Banks sued the Banking Commissioner (as the enforcement authority) in the 5th Circuit District Court in Austin Texas (Wells Fargo Bank v. James W.D. Tex. Civil No. A-01-CA-538 JN). The banks claimed that the law affecting bank fees was preempted by the National Bank Act. The court granted the banks' motion for summary judgment enjoining the commissioner from enforcing the law. The case is now on appeal.

You will need to check to see if your state prohibits the fee. There are some states that do not allow the fees: TN, GA, SD (I believe). These states' prohibitions are likely in jeopardy if the banks prevail in the Texas case.

Massachusetts does not prohibit the fees, but has a labor law that requires employers who pay by check to have a reasonably convenient arrangement (with a bank) whereby employees may cash their paychecks at par (no fee).

I read about the texas case a bit. My apologies if my opinion is not popular among other bankers, but I don't think this is the direction we should be looking to generate fee income.

I'm with you on that thought. While fee income is vital to our survival, this practice is not good customer service. We'll upset a potential customer(payee) who will complain to our existing customer (payor). We can find other ways to generate fee income.

I'm going to play Devil's advocate on this one. When you cash checks for noncustomers, you have an increased risk and you incur costs (employee time used to handle the transaction). If the drawer of the item later claims that the endorsement of the payee was forged, you have no one to go back againt and you may be stuck with a loss.

Particularly now, when there is increased pressure to check noncustomer payees against the OFAC list when you cash checks for them, and counterfeit IDs are so widely available, I think it's not inappropriate for a small fee to be charged to compensate the bank for the risk and the effort.

A payee can avoid the fee by cashing the check or depositing it at his own financial institution and many are now offering lifeline banking accounts at no cost or low cost.

I've looked at this issue from both sides. One problem we have with non-customers cashing checks is that it creates longer lines for our own customers. I think a fee that's less than a check cashing store would not be out of line. Also, this can be used as a way to encourage the non-customers to think about opening an account.

I know that we are working with some of our larger payroll customers to see about encouraging a Direct Deposit program.

Since you're playing Devil's advocate, I will return the favor If I am the drawee bank, it is my duty to pay checks that are properly payable, regardless of how they are presented. I would not want to be in a situation where a presenter refuses to pay a check cashing fee, opts not to cash the check over the counter, and subsequently screams wrongful dishonor. I know my example is extreme, but so is charging honest presenters a fee for the ill intentions of the .1%.

O.K. Let me see if I have this straight!?

You write me a check. The check is a 3 party contract between you, me, and your bank (there is case law to back this up). Each of the 3 of us has an obligation with respect to the check. But unbeknownst to me, you and the other party to the contract have entered into another contract affecting our three-party contract. (You gotta love a post that gives you the opportunity to use the word "unbeknownst.")

I take the check assuming that it is a negotiable instrument under UCC 3.104(a). This means that it is an "unconditional" promise or order to pay a fixed amount of money...with or without interest or other charges described in the promise or order, if it: (1) is payable to bearer or to order...(2) is payable on demand or at a definite time, and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money.... (I'm emphasizing the word "unconditional)

So, did you actually give me a negotiable instrument? Lets think about it... According to 3.104(a), it is required to be unconditional. Was the check you gave me unconditional? Lets look at UCC 3.106, entitled "Unconditional Promise or Order."

3.106(a) says that for purposes of 3.104(a), a promise or order is unconditional unless it states (i) an express condition to payment, (ii) that the promise or order is subject to or governed by another writing, or (iii) that rights or obligations with respect to the promise or order are stated in another writing.

O.K., UCC 3.106 states that your check is unconditional unless it states one of three things. Altough your check is subject to two of those things [(i) an express condition to payment and (ii) subject to or governed by another writing] it does not "state" either of those things. So, I guess you have passed the "unconditional" test and your check is a negotiable instrument--or is it???

Does hiding the fact that your check is subject to an express condition of payment and is governed by another writing make everything hunky dory in Negotiable Instrument Land? The commenters to UCC 3.106, in Comment 1, said that "the rationale (behind 3.106(a)) is that the holder of a negotiable instrument should not be required to examine another document to determine rights with respect to payment."

But I do have to examine another document to determine the rights to payment on the check you wrote. I would have to look at your account contract to determine that your bank charges a fee for me to cash the check over the counter. So let me get this right, you have just done exactly what the drafters of the UCC did not want you to do--made payment subject to another document--but because you did not tell me that you were doing it that makes everything o.k?

Don't you think that if the drafters did not want the face of a check to state that a holder must examine another document to determine rights with respect to payment, that they would have been even more opposed to a contract between a drawer and his bank affecting payment that you did not even tell the holder about!!! In their wildest imaginations the drafters probably never imagined such an arrangement--a writing affecting payment that is not disclosed to the holder--which is likely why they did not address it directly.

Whoa, Anonymous! Methinks (almost as good as "unbeknownst") we have a good case of paralysis through analysis here. Let me attack your logic on two fronts:

First of all, a check isn't a 3-way contract. There is no contract betwixt (there I go again!) the drawee and the payee. If the drawee dishonors the check, the payee cannot sue the drawee. That honor belongs to the drawer, with whom the drawee does have a contract.

Second, there is nothing in the contract between the drawer and the drawee that alludes to the check-cashing fee. It's just a fee charged to non-customers for cashing the check. And the fee isn't charged for in-clearing items; it only applies to over the counter presentments.

Methinks you are wrong--most banks that charge these fees have in their account agreements that a fee is charged for cashing on-us checks for noncustomers. If you don't believe me, check the account agreements for the banks involved in the Texas litigation that are currently charging a fee (I think only 3 or 4 of them currently charge the fee). They each have it in their account agreements.

You are correct--checks are not three party "contracts. Actually, as an order by one party (drawer) directing a bank (drawee) to pay on demand a fixed sum of money to a third party (payee), a check is a three-party "instrument."

"Personal checks are three party instruments with a payee, drawer, and drawee bank." State ex rel. Chan Siew Lai, 536 S.W.2d at 16.

"An ordinary check is a three-party instrument, involving the bank (as drawee), its customer (as drawer) and the payee" Seifert v. Seifert, 708 S.W.2d 150 at 154.

I stand by my paralyzed analysis.

There is nothing in the UCC that says that the payee cannot sue the drawee. UCC §4.402 gives no cause of action to anyone other than a "customer," but it does not necessarily preclude any action that the payee has at common law.

Hark, what light from yon window.... Alas poor Yorrick, I knew him well Horatio.... This post has taken on a Shakespearean tone.

John, yee hath some interesting points. I wast just wondering, didst yee agree with the last two responses or did yee just give up on convincing Anonymous that his/her logic be a little askew?

OK, "Z," I'll bite.

I'll concede that my sweeping statement that "most banks" don't include a reference to this fee in their depositor contract might have been in error, if Anonymous will concede that a handful of fee-charging banks in Texas doesn't necessarily constitute "most banks," either. I know Texas is (almost) our largest state, and has a lot of banks. But last I knew they didn't yet outnumber the rest of the banks in the country. I can only say what my bank does here. (Yes, we charge, a whole dollar!)

And I'm not going to be drawn into a spitting match on whether a payee can sue the drawee for wrongful dishonor. Let's just say the UCC doesn't provide for it.

But I still think that Anonymous was wound up too tight in his/her diatribe on this fee. Too much caffeine?

OK, just wanted to make sure that the horse was dead.

I just picked up on this thread and have a USA Patriot Act question for Mary Beth that I may have missed in reviewing the Act. Where does it indicate that we need to check the OFAC list when we cash checks for non-customers?

View this thread and I think it will answer your question, BBoyd.

Thanks for the reference to the thread (this is the second time today from you!) - I guess I was looking for the chapter and verse in the Act itself. Are you familiar w/that?

John--do you have a cite for this law?

Sorry -- this thread is so old and has gone in so many directions, I don't know which "law" you're asking about. If you define what you're looking for I may be able to help.