Answer:
This is a key Regulation CC issue; i.e. one that many banks do not address and one that could generate losses. Your procedures are good. The breadth of this response is for the sole purpose of encouraging others to evaluate theirs. The background: when a bank receives notice of a large dollar return, it is obligated to notify its customer. (Reg CC is a consumer protection law, the reason the large dollar return notice is sent to the depositary bank is so it can give notice to the customer who deposited the check.) The relevant portion of the regulation:
12 CFR 229.33(d) Notification to customer. If the depositary bank receives a returned check or notice of nonpayment, it shall send notice to its customer of the facts by midnight of the banking day following the banking day on which it received the returned check or notice, or within a longer reasonable time.
Please note, the regulation does not specify a method for notifying the customer or say what the notice must include. Notifying the customer by phone is efficient and certainly courteous, however the regulation's general disclosure requirements focus on written disclosures:
12 CFR 229.15(a) Form of disclosures. A bank shall make the disclosures required by this subpart clearly and conspicuously in writing.
To assure evidence of compliance, I suggest that banks make the phone call, but consider it as a courtesy, not as a part of their compliance effort. Instead, focus on getting written notice sent to the customer in the appropriate time frame. (If you counter that the requirement for written disclosures might reasonably be said to only apply to disclosures required by paragraph 15, I will concede the point, but still encourage you to only evaluate your written notice as your compliance effort.)
You mention that you send the check and the notice to the customer the next day. That clearly meets the regulation's requirements. However, banks oftentimes receive the notice days before they receive the check. The timeframe for notifying the customer begins when the bank receives the notice or the check, whichever comes first. If the check does not arrive the day after the notice, the customer's notice must still be sent.
Please note, there has been no mention of putting on a hold based on "reasonable cause to doubt collectibility." The customer is entitled to notice even if the bank does not impose a hold.
Although the regulation is very specific about what information the depositary bank is entitled to, it's a bit vague on "the facts" that the customer is entitled to. As the regulation is a bit fuzzy on this point, my suggestion is that the bank provide whatever information it received.
The bank's potential liability for failing to notify its customer is based on what happens between the time the customer was entitled to notice and when the notice was actually received. For example, the bank received notice of a large dollar return to a lumber yard in the same town on Monday, but did not notify the customer. Unaware that the check it received for the lumber was no good, the customer delivered the lumber on Thursday, a day by which it would certainly have received the notice. If the customer cannot collect from the drawer of the check, its chances of collecting from the bank are pretty good. About all the customer is going to have to say is, "Your honor, do you think I would have delivered the lumber if I had known the check was no good?"
First published on BankersOnline.com 7/1/02
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