Am I correct in the following scenerio?
1. If an account has a forged signature on a check, we must follow the midnight rule for returning said check.
2. Our signature card agreement give the customer 60 days to report the forgery after receiving his statement.
3. UCC Article 4 give the customer one year after the statement to assert a claim against the bank for the unauthorized signature.
4. If we do not return the forged check within the 24 hour period, we can try within the next 60 day window, but if receiving bank refuses, it is our loss.
5. If after 60 days, customer brings it in within the one year, it is bank's discretion whether to refund or not. We would require an affidavit for the forgery and persue legal actions against the accused.

I believe the customer receives the full year and it's not up to bank discretion. Unfortunately it's just a cost of doing business.

The UCC allows for amendment to the timeframes by agreement. So if your disclosure says the customer has 60 days, then the customer has 60 days. Hold them to it- as you have added that provision to your agreement in order to avoid the burden of unnecessary losses. You are not required to honor their claim after that.

Regarding the late return- while alot of banks do this just to try avoiding the loss, it's not a good practice. You should either return the item by your midnight deadline or not at all.

The best way to proceed in this situation is to let the customer know that you will not reimburse them for the claim, because their 60 day window has passed. Leave it on them to report the forgery to law enforcement. It is also a good idea to offer to assist the customer in their investigation. Have them provide a letter to you authorizing the release of documents relating to the forgery to law enforcement so the can expedite prosecution.

How would you handle this one? Our customer(wife) is claiming a forged item that was payable to her husband and cashed at another bank. Our customer notified us within 2 days of us clearing the item (but we can't return timely). We received a forgery affidavit from our customer. Would you refund the customer (the $1,200)???

I am assuming you are referring to a forged maker's signature.
Now it gets a little stickier because they may be in cahoots to try and get some free money out of you. Your forgery affidavit should state that the maker did not authorize the item, and did notreceive any benefit from the proceeds. Consider those two terms closely before paying any claims:
Authorization- If the wife has routinely allowed the husband to sign her name on her checks for 'convenience' you may be able to make a case for apparent authority.
Benefit- Where did the proceeds go? Did the $1200 go into an account owned by the wife, go toward the payment of a bill on which the wife is an obligor? Did she come home to new living room furniture?
If you have satisfied yourself that this item is indeed unauthorized and the maker clearly received no benefit- then you are required by the UCC and your account agreement to reimburse the maker. Upon doing so, make it absolutely clear to her that by paying her claim, the Bank is now the victim of a crime. And as a victim, you will exercise your right to prosecute the forger (presumably her husband) whether she likes it or not.

Under U.C.C. Section 3-406 it is not a given that the bank has to reimburse the customer. If the customer has been negligent in a manner that contributes to the making of a forged instrument, the customer should be responsible for some of the loss. In most instances it becomes an issue of comparative fault. We require an affidavit of forgery and police report before we make a decision on reimbursement. We then make a decision based on the individual fact situation. It often results in a division of the loss between the bank and customer, but its better than the bank taking the entire hit.

I did not realized we could condition the reimbursement to our customer to... say include a police report filing? This might certainly save us some money. Are others doing this as well before reimbursement on forgery claims?

I don't think you can condition reimbursement on the customer filing a police report. As I said earlier, once you have paid the claim, the Bank becomes the victim. At that point, the customer cannot keep you from filing a police report. Present it to the customer that way- and they may withdraw their claim.

We are FDIC regulated. Does this make any difference? We may be doing things wrong. Our theory is that no crime has ocurred until it is reported to the police. We have a clause in the affidavit that says that the affiant had no knowledge of the transaction, didn't participate or benefit from it in anyway and that he/she will testify in Court to the facts as outlined in the affidavit.

Generally, when it's a family member, the victim doesn't want to proceed and we don't pay out.

You can condition reimbursement to the customer on anything you want. The question becomes a risk/reward equation. What can I do to minimize the loss to the bank and not push the customer so far as to end up in a lawsuit. I usually take a customized approach to these instances. I treat a $10.00 forgery a lot different than a $10,000 forgery. Like it or not, we may (and should) push the envelope of the law at times when it comes to handing out shareholder money. Especially in cases where the customer appears to have contributive negligence or is less than totally cooperative.

When I first started handling check forgeries, I did not require a police report. Not once after getting the money back was the customer willing to cooperate with police when we tried to go after the alleged forger. Now we do require a statement to the police to be made prior to giving back the money. You would be surprised how many people drop the entire thing because it was a family member or friend who did it and they don't want to get them in trouble. You also want to make sure that you contact the police if you do reimburse the customer so that they know that you are now the victim in the case and that any financial restitution should be sent to you.