Bank Operation
BNKG 1303
Session 5 - Checks as Negotiable Instruments
| Negotiable Instruments Types: | |
| Draft - a three-party instrument - the drawer, the drawee and the payee | |
| Check - type of draft - drawn on a BANK | |
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Types of checks: Certified Check - almost never used today - too much trouble and limited acceptance - few understand these anymore. Cashier's Check - drawn on bank with own funds - purchased by depositor OR non-depositor - NON-Cancelable. Traveler's Checks - drawn on one of a few specialty 'banks' - sold to be used as cash - issuer accepts liability for misused checks - makes money from fee AND fact checks take a long time to be used. Traditional Checks - personal or commercial - every day usage |
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| Endorsement Types: | |
| In Blank - just a simple signature - if found before deposited - can be negotiated by finder - even though may not have legal right to funds - sort of a 'finders keepers' - subject 'holder-in-due course rules'. | |
| Restrictive - (often Best) - "For Deposit Only", or "Pay to the order of ..............." and then sign your name. Cannot be used by anybody other than that of restrictive endorsement. | |
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In these days of debit cards and even "check cards" our economy still relies tremendously on the use of checks. A check is nothing more than an order by the owner of funds - to the holder of those funds - to give some of those funds to the payee. Some years ago, the checkless society was predicted. Based on all the forms of electronic funds transfers - debit cards - credit cards - automatic payments - it seemed there would be less need for a paper based payment system. The reality is that check volume continues to grow at a rate of around 4% per year. Since check volumes had been growing at 7 to 10% in years past this rate certainly represents a reduction in growth - but does not predict the end of the paper check. A check - is a specific type of negotiable instrument. As a part of that larger group - there are many commonalties between all negotiable instruments. The parties involved in this transaction include the "Drawer or Maker", the "Payee" and the "Drawee". Simply put, the Drawer orders the Drawee to pay the Payee. A check has additional characteristics which include provision for a date and pre-encoded magnetic ink characters that facilitate the use of automated processing equipment. The date is important, in that if the date is current or within the past six months - it represents a Demand draft. A check dated into the future is known as a Time draft. In reality, checks dated into the future represent a number of interesting problems for financial institutions. The basic problem with checks dated in the future - but presented currently - is that they should NOT be paid by the bank - until that date. However, since the date is NOT part of the magnetic encoding on the check - there is no way for the bank to know that the check should not be paid. This becomes a common ploy when a consumer , for example, makes a payment on a credit card - that is due - but for which the consumer does not have the money. As with anything that involves money - checks involve considerable legal issues. The larger the amount of the check - the more critical the legal issues. The most basic of all issues is how the Drawee bank knows who to pay. If the Drawer makes the check payable to "cash"or "bearer" then ANYONE who has the check is entitled to those funds. If the check is made payable to a specified person - then ONLY that person is entitled to those funds. Yet, in most cases, the Drawer bank is not the financial institution where that check is first presented. Therefore, there are sets of rules that deal with the endorsement and what happens if that endorsement proves not to be proper. |
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| Endorsements (or Indorsements) - are necessary to accurately transfer title of a negotiable instrument. A simple endorsement consists of the payee's signature (or mark or facsimile). Other forms of endorsements include special or restricted and qualified. It is important to understand the use of each type. |
| Holder in Due Course - is a legal concept that implies that each subsequent holder of the check is entitled to the funds represented by that check. Someone finding a check, may be able to negotiate it and receive credit - but since they 'found' the check - they are not considered a Holder in Due Course. If the check was 'found' under less than legal circumstances the holder - may not be entitled to those funds. |
| Stop Payment Orders - are requested by the drawer to the drawee NOT to accept a written check. As with endorsements - there are substantial legal consequences on the acceptance or rejection of a check based on a stop payment. |
| Certified Checks - are almost never used anymore. A certified check is a check written by the drawer - that has been guaranteed or 'certified' by the drawee bank to be paid. Once certified, that check WILL be paid by the bank - as opposed to other checks that will be paid ONLY if there are funds in the account at the time the check is presented. |
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Cashier's checks or Treasurer's checks - are checks drawn on the bank itself. These checks are purchased to be used to transfer funds to the payee - without worry that the check may not be honored. |
| Official checks - are checks often used by financial institutions - much as would be a Cashier's check. The major difference is that the Official check is drawn on ANOTHER financial institution - which has considerable impact on the eventuality of a lost or stolen check. Since the Official check is drawn on another institution - the bank itself can place a stop payment on the check without the same legal ramifications that exist if the check were drawn on the bank. |
| Money Orders and Travelers Checks - are checks that are purchased for specific purposes. Money Orders, similar to Cashier's checks represent funds that are known to be good (as opposed to personal checks where there is a 'hope' the funds are available. Travelers Checks are issued as an alternative to the use of cash - wherein the drawee financial institutions assumes the responsibility for lost or stolen checks - in exchange for the fee paid for their purchase. |
| Regulation CC - created out of the Competitive Equality in Banking Act of 1987" placed new requirements on the timeliness of processing of checks. In order to make funds available in an expedited manner. New rules on endorsements, acceptance and processing times reduced the risk to the drawee bank. |
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Session Internet Resources
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| Negotiable Instruments |
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There is NO specific assignment for this session. |
| For each session, you must answer completely ONE of the questions provided, and email your response to the instructor by midnight the Friday of the session week. While answers should be developed fully, it is anticipated that each answer should be approximately one page in length. |
| Why is importance to 'know' the endorser(s) of a check? What are the ramifications of 'knowing' or NOT 'knowing' the endorser? |
| With all the alternatives to paper checks - what do you believe that will be the impact on the number checks written in the next 5, 10 and 20 years? |
| Define - completely - the term "negotiable instrument". |