During a disaster, and in the days following it, two groups of financial institutions may face item processing issues:
-- Payor institutions whose customers' checks may face clearing delays due to either the financial institution being directly involved, or the clearinghouse or Federal Reserve Bank or some intermediary institution being directly affected. The delays may result in the payor institution having to pay or return items outside normally acceptable time frames.
-- Depository institutions whose customers have deposited items on which the returns are delayed.
What is the operative law? Under what circumstances are the delays legally excusable? What steps could depository institutions take to protect themselves from losses?
Article
4 of the Uniform Commercial Code embodies the midnight deadline requirement for the return of checks. Compliance with the midnight deadline may be excused under certain conditions under Section 4-109(b) of the UCC, which provides:
Delay by a collecting bank or a payor bank beyond the time limits
prescribed or permitted by this (Act) or by instructions is excused if:
(i) the delay is caused by interruption of communications or computer
facilities, suspension of payments by another bank, war, emergency
conditions, failure of equipment, or other circumstances beyond the
control of the bank, and
(ii) the bank exercises such diligence as the circumstances require.
If a check deposited into your customer's account is returned unpaid due to NSF, closed account, or other reason, and it appears the item's return was not timely under the UCC, we would urge you to investigate the facts before you consider making a claim of late return. If circumstances were such that the delay was caused by conditions stemming from the terrorist attacks, the late return will be excused, so long as the payor bank and/or collecting bank exercised such diligence as the circumstances require. In the event of a dispute, a court would ultimately have to examine the facts to determine whether the delay was, in fact, occasioned by emergency conditions or other circumstances beyond the control of the bank, and whether the bank exercised proper diligence. If the facts are such that you can't win on the claim for late return, don't start the fight.
If your bank is the payor bank, keep in mind the requirement for you to exercise "such diligence as the circumstances require" in delaying beyond the midnight deadline.
If your bank is the depository bank and your customer is making deposits of items from banks or locales that you know are directly impacted, you may be concerned about potential losses that could occur if you are required to give your customer availability on the deposits before you are likely to learn of any returns. You will face a business decision -- and a public relations decision -- relating to whether you should adhere to your normal funds availability schedule or investigate the applicability of an exception hold.
Regulation CC provides an exception to the normal avilability schedule in the event of delays incurred as the result of events like
the terrorist tragedies.
The emergency condition exception hold guidelines under Regulation CC are found in Section
229.13(f)) That section allows an institution to place an emergency condition exception hold on items deposited into covered accounts (DDAs and NOW accounts) and delay availability of funds in these situations:
An interruption of communications or computer or other equipment
facilities;
A suspension of payments by another bank;
A war; or
An emergency condition beyond the control of the depositary bank, if
the depositary bank exercises such diligence the circumstances require.
There have been very few cases or regulatory guidance involving the
interpretation of these provisions and none of them in situations
remotely similar to the events of September 11. As a result, the question of whether an emergency condition exists is one that would have to be resolved by a court in the event of litigation.
From a pure risk management situation, if your institution accepts a deposit that you have strong reason to believe may be affected by the tragedies, the safe thing to do from a collectability standpoint is to
place an emergency exception hold on availability of the deposited funds until the status of
the item is determined.
On the other hand, the public's confidence in the banking system could
be adversely impacted if this practice were widely implemented, so even if circumstances warranted using such a hold, it would probably be prudent to reserve its use only to large deposits (since those would pose the greatest risk). If you limit the delay in funds availability to large deposits, it would be wise to simply use the large dollar exception hold instead, under which you can place a hold on the amount of the deposit that exceeds $5,000 (subject, of course, to next day availability for the first $100 of the part that isn't eligible for next day availability). By using the large dollar exception hold, you don't face any uncertainty over applicability and don't have to make an association between the hold on the deposit and the tragedy.
What the laws and regs allow you to do is one thing. What you should do, to avoid inconveniencing your customer or another financial institution, and to preserve confidence in the banking system, may be something entirely different. We have every confidence you will choose wisely.
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