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Spotlight On…Claims
Transactions that go through without any problems make up the bulk of the day's work. But every now and then comes a 'glitch' in the unusual item. What do you do with it? We'll take a look at the more common problems, and try to give you some procedures and remedies.
Encoding error
We covered this briefly in the section on the Uniform Commercial Code, but let's take a look at the actual handling of the check.
How much?
The first determination is, believe it or not, how much is the item? If it's under $100, you may as well just make the adjustment - credit your depositor and charge it to your General Ledger account under "cost of doing business." Many banks (almost all very large ones) will no longer handle adjustments for under $100 without charging a 'service' or 'handling' charge - usually about $30. So it may not even be worth the time, effort and postage it will take to make the adjustment, no matter which financial institution has the liability. The flip side of that coin is, of course, other financial institutions will no longer be sending you adjustment requests for under $100 either.
'Their' problem
The bank that encoded the check is liable for any error. Assuming your customer has brought the check to you because of an error in that the check has been encoded and paid for more than he wrote it for, you'll turn the check over and look on the back to see which financial institution was the bank of deposit. That's the one you'll have to write to in order to get the adjustment for your depositor. Your letter should be addressed to the attention of Adjustments, Bookkeeping or Settlements in Operations. (Editor's tip - If you can locate the name of a person in that area, you have a much better chance of quickly resolving the problem.) In the letter you will enclose the original check if it is available, or an excellent copy of the front and back of the check along with a request for an immediate adjustment for the difference in the form of a cashier's check payable to your institution. Keep a copy of everything, of course. When you get the check from them, credit your depositor if you have not already done so - or your General Ledger account if you have.
'Your' problem
You've received a letter in the mail from another financial institution, sending you a check drawn on one of their accounts that has been encoded by your bank in an incorrect amount - almost always for more than the check was written. Keep in mind the written amount takes precedence over the numbers, as the correct amount of the check Look at the check carefully to be sure there was no doctoring by the drawer. (Editor's note - Sorry - I have a suspicious nature!) If it is a clear, concise case of incorrect encoding, see what account it was deposited into, charge the account the difference, write a check for the difference payable to the financial institution that sent you the item, and mail it off to them. Be sure on the charge to your customer you explain why the charge was being made - it's a good idea to furnish a copy of the check in a letter to your account holder.
"Unjust Enrichment"
In the case of very large amounts, if the depositor was credited for a great deal more than the check was written for, you may find the account is closed, and your depositor has disappeared. This is a case of "unjust enrichment" and is cause for investigation, action, and possibly a Suspicious Activity Report. In any case, whether you can make recovery or not, you are liable for the difference in the amount to the drawee bank. You may be in a very large loss position.
Credit first or later?
When the error was not committed by your bank - do you credit the depositor when he/she brings you the claim or after the adjustment is made by the depository bank? There are no Regs or rules on this - it would be up to the policy, procedures, and decision of your bank whether you do so or not. Either is correct. (Editor's note - At the risk of entering a personal note - I was always reluctant to use the bank's money, so I waited as long as I could before crediting the depositor's account!) If your financial institution is at fault, however, the adjustment to the customer's account should be immediate after investigation shows there is no doubt of your liability.
Not 'Yours' OR 'Theirs'
You may have a corporate customer that does their own encoding for settlement before their work is picked up by courier. In that case, if the customer makes an error in encoding the problem is YOURS ... unless you have a separate agreement with your corporate customer that says any encoding error they make will be their responsibility. Be sure you have such an agreement on file. Note that in the last part of (a) below, you are specifically held liable if your customer makes the error. Therefore, indemnification is vitally necessary.
UCC
The encoding warranty is new under the revised UCC. It is found in Section 4-209 and is simple and straightforward. We've reproduced the actual wording for you here.
U.C.C. Article 4:
Bank Deposits And Collections
Part 2 - Collection Of Items: Depositary And Collecting Banks
§ 4-209. ENCODING AND RETENTION WARRANTIES.
(a) A person who encodes information on or with respect to an item after issue 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.
(b) A person who undertakes to retain an item pursuant to an agreement for electronic presentment warrants to any subsequent collecting bank and to the payor bank or other payor that retention and presentment of the item comply with the agreement. If a customer of a depositary bank undertakes to retain an item, that bank also makes this warranty.
(c) A person to whom warranties are made under this section and who took the item in good faith may recover from the warrantor as damages for breach of warranty an amount equal to the loss suffered as a result of the breach, plus expenses and loss of interest incurred as a result of the breach.
Copyright © 2003 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 13, No. 9, 12/03
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