If our bank customer alleges that he wrote a check to someone for $10. But after reviewing his statement alleges that the payee frauduently altered the check for $1,000 what would be the bank's recourse if we cashed the check in good faith?

Secondly, would it be permissible under 604(3)(a)(9) to pull a credit report on a former customer if I have his SSN? The payee name's is the same as our former customer, except for the middle initial.

If the customer completes an affidavit of forgery, it would appear that you would be on the hook for the difference. You'll have to prosecute the payee.

The answer to your second question would appear to be no - I see no permissible purpose under FCRA.

Why would the bank be on the hook if the check was paid in good faith not knowing about the alleged alteration? Why would the customer NOT be on the hook since he signed the check and has to bear some responsibility for his business dealings?

There are two places on a check for the customer to indicate the amount - a $ field and the place where he was supposed to write it out. Do those two places agree? Granted, it is relatively easy to change $10.00 to $1000.00 but I think it would be much more difficult to change "Ten Dollars and no/100" to "one Thousand Dollars and no/100" without it being noticed. If it is an obvious alteration, then the bank who paid the check is on the hook and should go after the person who endorsed the check and received the illegal funds.

It was not obvious. The 10 was changed to 1,010 and it is written as one thousand and ten dollars. The elderly customer "could" have asked the payee to fill it out and one thousand was added after the customer signed it or the customer could have started writing the ten dollars part in the middle of the line.

"Altered Check" = "Check Fraud" IF this customer did NOT authorize the check for $1010, then I would have him/her sign an affdavit of forgery and refund the money.

The bank is liable if the customer has exercised due diligence in examining a statement for the account and notified the bank of the alteration in a timely manner.

If the customer was in some way negligent, then you may have legal defenses to deny the claim because the customer did not properly "secure" the negotiable instrument.

Your state law should describe the liability here. Generally, the paying bank has to follow its customer's instructions. If he instructed you to pay $10, you aren't entitled to pay more. (The fact that the check was altered doesn't change what the actual instructions were.)

You may be able to limit your liability if your customer was negligent or recover against the bank of deposit or endorser based on endorsement warranties.

You may also want to run a search on these threads, looking for "altered check".

Recovering from the depositing bank for breach of warranty would make sense- except I'm not sure there is another bank. At least that's how I read the original post- perhaps you could clarify this, Stev- was the check presented at your bank, or through inclearing?

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Secondly, would it be permissible under 604(3)(a)(9) to pull a credit report on a former customer if I have his SSN? The payee name's is the same as our former customer, except for the middle initial.

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I do not believe you have a permissible purpose in this case to run a credit report.

The check was presented and cashed at my bank. The customer reviews his statement and notifies us of the alteration. Where does it say specifically who bears responsibility? I found something that states a payor bank or drawee paying a fraudulently altered inst., in good faith, may enforce rights with respect to the inst. (i) according to its original terms, or (ii) in the case of an incomplete inst. altered by unauthorized completion, according to its terms as completed.

You're looking at UCC 3-407(c), which is a good starting point. Also take a look at UCC 3-406(a), which states in part "A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument... is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection." The burden of proof will be on you to show that the maker was negligent. So try to get a detailed statement from your customer about how he actually made out the check- and get copies of his other checks to verify/refute his claim. Also keep in mind the most important question- is keeping this customer worth $1000? If so, pay the claim.

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Also keep in mind the most important question- is keeping this customer worth $1000? If so, pay the claim.

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And just as important - is it worth the $1,000 to fight the customer over it? Also, you might want to weigh reputational risk if this poor little old elderly person goes to the press and says the big bad bank paid a forged check against my account and won't make it good so I'm eating dogfood. If you think the customer presents a risk for this happening again, you can always close the account after the claim is paid. If I were you, as you said this was an elderly customer, I would make sure to get an affidavit of forgery and get the police involved - I would want this forger off the streets before he stikes again. If they skate on this one, you might be facing more than three zeros next time.

Y'all are all around it, but I think the answer is:

The Drawee bank (your bank) may charge Drawer (your customer) according to the original terms of the altered check. UCC §4-401(d)(1). Your bank may now recover against the person who altered the check. The person who altered the check breached a presentment warranty that the check was not altered. UCC 3-418(c), 3-417(a)(2) and (b) (first sentence), 4-208(a)(2) and (b) (first sentence).

If you think the drawer contributed to the alteration:

Like JacFSB stated above, UCC 3-406(a), states in part "A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument... is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection."

If the person you think should be precluded under §3-406 (your customer), proves that the bank asserting the preclusion (your bank--the drawee bank) failed to exercise ordinary care and that such failure substantially contributed to the loss, the loss may be allocated between the two parties on a comparative negligence basis. The burden of proof is on your bank to show that your customer was negligent so as to invoke the preclusion defenses, and then the burden of proof is on your customer to prove your bank’s negligence to trigger comparative fault.

Ordinary care is defined at BCC §3.103(a)(7). It provides that ordinary care means observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged. In the case of a bank that takes an instrument for processing for collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank’s prescribed procedures and the bank’s procedures do not vary unreasonably from general banking usage not disapproved by this Article or Article 4. (See Comment 4 to UCC §4.406)

If the bank decides to defend its actions it should provide uncontroverted affidavits of industry practice. If the bank has a prescribed procedure and stuck to it, and if the procedure does not depart unreasonably from the signature verification procedure used by other banks similarly situated, the bank should not be guilty of negligence in paying the forged amount of the item.

In the final analysis: If the customer was negligent, he/she may have to bear the loss. If neither party was negligent, the bank likely will bear the loss.


For the future, to reduce losses in this area, I would make sure that the following has been done:

(1) have a written policy regarding check verification that the bank follows;

(2) make sure that that policy does not vary substantially from that of comparable institutions, unless the bank wants to take the lead on a cost-benefit basis;

(3) include a provision in the deposit agreement that embraces the bank’s policy and thereby gives full disclosure to the customer;

(4) include a provision in the deposit agreement stating that both the bank and the customer consider the bank’s policy to be commercially reasonable.

I'm reading a couple of things here...it was a good alteration, therefor you feel the client is at fault because the criminal was good at his "job"? If you look at the clients account and review other checks, has he been writing checks in the same manner for some time? Sounds just like my grandfather writes his. Sure I'd like him to write "only" in front of the amount and "exactly" after the amount like I do, but heck, he's not as anal as me (and he has alot more money so there might be something to his way of doing things). I also think the second issue was well stated with:

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And just as important - is it worth the $1,000 to fight the customer over it? Also, you might want to weigh reputational risk if this poor little old elderly person goes to the press and says the big bad bank paid a forged check against my account and won't make it good so I'm eating dogfood.

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Is he a long time client? Follow the proper paperwork chain, turn it into the police like any other forgery and pay the poor old guy. If he's willing to prosecute they guy who cheated him, he's most likely legit. If it was his grandson and he won't fill out the docs you have some wiggle room.

THOUGHT TO PONDER:

I have always had a bit of a problem with banks looking at an issue with their "is he a good customer" or "is he a long time customer" glasses on. With regard to an altered check are banks going to treat the local business leader with lots of loans and accounts differently than my little old grandmother who only has her social security checks in the account. My grandmother's altered check is probably the difference between eating food or dogfood, the business leader is probably not looking at starving (and if the altered check is large enough for him to have to make the dogfood/people-food decision, the bank is not likely going to eat the check voluntarily just to keep his business).


Don't short time customers and small account customers deserve to be treated the same.

JUST FOR DISCUSSION.

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Don't short time customers and small account customers deserve to be treated the same.

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Oh no, I'd agree with you. I guess when I say good customer...I think of the person who hasn't had 42 od's and 98 nsf's over the last 12 months, who's claim might warrent a tad bit more investigation. The same might be said for someone who's been a client for a day or a week. It dosen't mean you don't pay, it means you spend more time examining the issue, but if the check is legit, you pay the claim. I believe people with large deposits can be criminals too

If he's willing to fill out the paperwork and follow through with the prosecution efforts of local law enforcement, the loss should be returned to him.

Agreed! Particularly if it is a family member who committed the alteration--if you aren't willing to prosecute, I am not willing to believe you.

Thanks for the input. It appears that the elderly man got the payee to fill out the check for $10 then he (our customer) signed it. Or perhaps the payee filled it out as $1,010 and he signed it without noticing it was not $10.
Concerning another aspect of this and if you charge it off, would you normally charge it to the branch where it was cashed or to the branch that handles the account? I can see NOT charging it to the branch where it was cashed IF proper procedures were followed and the teller could not have prevented it.

But why charge the branch that the account was located at? They had nothing to do with it. When I was a teller, good call or bad, if I took a charge it hit our branch and my record. Recoveries offset that, but they made they choice to cover the item. Charging the branch of the account seems to be unfair in my mind and sets a bad precident. If another branch makes another error, not so clean, do you do the same thing? What if they didn't have an account with you? It's cleaner to charge the area that completed the transaction on a consistant basis.

If bad sigs go through proof do you charge them?????

(See how bad it could get?)

RANT WARNING!!!

Oh my god - do you now how many hours I have wasted in my career over arguing who is going to get charged with what..... AAAAUUUURGGGHHHHH!!! Have someone make a call and be done with it.

END RANT

LMAO the only people who care are at the location being charged

I'm not feeling well today...that rant added a giggle to the day! Thanks!

Don't you have to have a request for credit to pull a credit report?

In some cases, you do not need a request. For instance, if the consumer has an open account with your institution, you are allowed to obtain a credit report to make sure the consumer still qualifies for the account.

However, the original poster wanted to know if they had a sufficient reason to pull a credit report on the person they thought cashed the altered check. The name was similar to that of a former customer, and they had the SSN of the former customer.

I do NOT believe that situation constitutes a valid reason to pull a credit report. Yeah - back in the "old" days, I think it was done all the time. But that's one reason why the FTC has issues oodles of opinion letters on FCRA.

If this check was not cashed or deposited at your bank, then the bank at which this item was negotiated is on the hook. They warrant the check against material alteration. Send that sucker back ASAP!