SPOTLIGHT ON... Return Items

SPOTLIGHT ON ... Return Items

Handling return items is one of the most complex parts of bank operations. Whether the check is drawn on you and being returned for cause from you to the depository bank, or is being sent back to you to charge back to one of your depositors, there are careful investigations, determinations, and multiple, important decisions to make many times a day.

Timing
Returning a check drawn on your financial institution must be done within a very strict, certain period of time. A check that comes in through the work for payment against one of your depositor's accounts must be on its way back to the depository bank by midnight of the day following receipt, according to the regulations issued by the Federal Reserve Bank. If you miss that midnight deadline, the check is considered "paid" and can no longer be sent back through Fed to be returned. So if you receive a check through the exchange on Monday morning, the decision to return it has to be made before midnight on Tuesday.

Sometimes it's difficult to make officers and managers in the branches realize how important that timing is, resulting in delayed responses and decisions. The fact is, if the check is not returned in a timely manner, it is paid and you're stuck with it. You may write to the bank that took the deposit by 'snail mail' and ask if they'll take it back. This is called a "without entry return" and often is unsuccessful.

The amount of the check makes a difference, too, as there are some circumstances where you must call the bank you're returning the check to if it is over $2,500. In the other direction, if you get such calls from a bank that is returning checks to you for over this amount, you are considered to be "put on notice" and can put a hold on the depositor's account, anticipating the return of the check. These rules are also all covered under Regulation CC, which came from the Expedited Funds Availability Act.

Bouncing
When one of your account holders overdraws an account, your financial institution may decide to "bounce" the check. If there are multiple checks in, and only enough money in the account to pay some of them, but not all of them, you must decide which will be paid and which will be returned. Your bank may have a hard and fast policy that you pay only the largest item(s) possible and return all others. Some banks pay the smallest ones first - as many as possible. There are several methods and procedures in our industry about which order to use, and how to decide which checks to pay.

There were recently some lawsuits against financial institutions by individuals claiming banks that pay largest checks first do so for the express purpose of being able to charge more for multiple checks being returned. The most common defense was that banks pay the largest checks first because they are usually the most important of the checks (e.g., the mortgage or car payments). The courts determined that banks may choose the order in which they honor checks. (Whatever method your bank uses, you may be sure there will be exceptions requested by the customer service people in the branches!)

A fairly recent product in many of our institutions is overdraft protection. This is now also being scrutinized closely by consumer groups, due to the fees involved and the question as to whether some products are closer to loans than they should be. Whatever programs and/or products your financial institution uses, you will have to made a determination and decision on each check you return that is written on your depositors' accounts.

Where To Send It
On the back of the check will be a stamp with the name and number of the financial institution which accepted it for cashing or for deposit, sent it to the Federal Reserve, and through them to you for payment. Regulation CC says this endorsing bank stamp must be able to be read, or the liability for any loss involved will be transferred to the endorsing bank. So it's important for that stamp to be clear.

You may remember it also used to state right above the endorsing bank's number and date "PEG" - which stands for "Prior Endorsements Guaranteed." The new UCC says as soon as the endorsing bank puts their number and date on there that the guarantee of endorsement is implied, so it no longer has to have the "PEG" printed. (Interesting to note that everywhere else in the UCC and Fed the word is "Indorsement", not "Endorsement." Those of us who are slightly irreverent when it comes to Fed decided they used the "E" on the back of checks because they didn't want it to read "PIG!")

In the scheme of things you should have no problem deciding where to direct the check when you send it back through Fed. In the case where you cannot read the endorsing bank stamp, Fed will have to trace it through the settlement tapes and totals - which takes time. Be cautious of those returns.

Reason For Return
On the face of the check you will mark the reason for return. Normally you'll use a stamp that has a multiple choice with boxes to mark the reason. The most common is, of course, "NSF" (Non Sufficient Funds) You may also choose "Uncollected Funds," "Unavailable Funds," "Stop Payment" (or "Payment Stopped"), "Account Closed," "Refer to maker" (not used too much any more), or "Other." The last one could be important. You may need to make a special notation in that area such as: "Needs two signatures"; "Signature does not agree with one on file"; "Checks reported stolen"; "Duplicate check"; "Counterfeit check." Any of these last four reasons are of extreme importance to your security officer and should be shown to him/her quickly if the determination is made that this is the reason for return.

Your security officer will be particularly interested if you find checks that were deposited into an account being returned, and checks in the same amount being bounced. The return items person who remembers a name with a lot of that type of activity will be able to spot a kite in the early stages. And in a kite situation, it's often the first financial institution that finds it that is the only one that does not take a large loss.

Copyright © 2003 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 13, No. 7, 10/03