I only wish I could say "refer to maker" was never an acceptable reason to return a check. For those who did not see it, here's the portion of the post being referenced:
[On a side issue, Regulation CC requires a bank returning a check to give a reason for return. "Refer to maker" is not a reason. With a customer affidavit on file, it is appropriate to say, "Counterfeit."]
The fact situation posited by the original questioner was one where the bank had a legitimate reason for returning the check, but instead it used "refer to maker." That illustrates the problem from my point of view. 'Refer to maker" is rapidly becoming universal reason for return when circumstances are somewhat out of the ordinary. Its use denies the depositary bank and the payee of the check some critical information.
Regulation CC says our partners in the clearing system are legally entitled to know why a check is being returned unpaid: 12 CFR 229.30(d) "A paying bank returning a check shall clearly indicate on the face of the check that it is a returned check and the reason for return." Unfortunately, in my opinion, the Commentary to that section indicates: "A reason such as 'Refer to Maker' is permissible in appropriate cases." There are no examples of what "appropriate cases" might be.
There is tremendous practical value in clearly stating a reason for return. Let's say yours is the depositary bank. This morning you get calls on four large dollar which you accepted for deposit a few days ago, each for $15,000, that are now being returned to you unpaid. The individual reasons given are:
- insufficient funds,
- endorsement missing,
- account closed and
- refer to maker.
You know you have to notify your depositors of the impending returns under 12 CFR 229.33(d), but before you do you will use the information to your own advantage. You need to decide how much risk the return item represents and how to best protect your institution from that risk.
Assuming this is the first presentment for the "insufficient funds" item, it is still a cash item and can be presented through the clearing system again. Most items are paid on second presentment. The risk to your institution is whether your customer can, at least temporarily, absorb the reduction in his account balance. If the current balance in your customer's account is $84,000 and the average balance is $91,000 you may not feel too much heat. You may revoke the provisional credit you gave under the UCC, put a hold on the funds under Regulation CC, or you may feel that the amount of risk involved is acceptable and do nothing. No matter what you decide, you will notify the customer of the item's impending return and any plan you have for reducing the bank's risk.
"Endorsement missing" is generally, sometimes mistakenly, thought to be a risk free return item. Under the modern version of the UCC, your bank automatically guaranteed the missing endorsement when it placed its own endorsement on the back of the check. Yet, when a check is returned for this reason you normally use a stamp that says "Credited to the account of the within named payee, absence of indorsement guaranteed…" on the back of the item. You are not making an additional promise. Under UCC 4205(2), you already promised everyone else involved that the payee either got the money or it went into his account if the other bank is willing to accept your stamp, there was no tangible reason for it to return this item to begin with.
However, experience has taught you that some banks will return an item "endorsement missing" the first time and then return it for a different reason, "insufficient funds" or "payment stopped" the second time. Here, you will assign a risk factor beyond that attributed to a need to whack the item with a rubber stamp, make your decision about what to do and then notify your depositor.
The third item that is being returned, "account closed" is no longer a cash item; it cannot be presented through the clearing system or even banktobank. Your concern here is a little more refined: "Can my customer afford the loss?" Even using the same current and average balance information as above, you might choose a different, more conservative approach to minimizing the risk to your institution. No matter what, you are still going to notify the customer of the item's impending return.
On the "refer to maker" item, how do you evaluate the risk? Is it still a cash item? To protect your institution, should you take the most conservative possible approach and revoke the provisional credit you granted for the item? Also, what about the notification to the customer? He will ask you, "What does "refer to maker" mean?" My answer was always, "Well there is a problem, but the other bank is refusing to tell us what it is."
What is the customer, the business or individual whom Regulation CC was supposed to protect, expected to do now, follow the instruction and go ask the drawer why his check was not paid? (In the example that spawned this article, if the drawee bank had simply told the payee that the check was "counterfeit" the payee would not need to confront the drawee bank's customer over the item, it would know it had been defrauded.) Can the customer file a civil suit or a criminal complaint on check marked "refer to maker" or must he sue on the underlying obligation?
"Refer to maker" is a valid reason for return "in appropriate circumstances." Its continued misuse may very well engender a change in the Commentary that would not require an act of Congress. Allowing drawee banks to use such a reason makes it easy on them, but shifts a burden of ambiguity to the depositary bank and the payee. From my perspective, the scales are tipped in the wrong direction.
First published on BankersOnline.com 11/5/01