Compliance Corner

QUESTION Are we prohibited from allowing customers to transfer funds from a business account to a personal account through online banking transfers?

ANSWER No, we are not aware of any law or regulation that would prohibit you from allowing a customer to transfer funds from a business account to a personal account using online banking — provided the customer is QUESTION ANSWER We do not believe you need to include the dollar amounts of available funds during holds in your initial Regulation CC disclosures, provided that the model availability policy you are using (Model C-1) accurately reflects the specific availability policy followed by your bank in most cases. Under Regulation CC, banks must provide potential customers (and any person who makes an oral or written request) with the bank’s applicable specific availability policy disclosure. According to the official commentary to Regulation CC, the disclosure “must reflect the availability policy followed by the bank in most cases, even though a bank may in some cases make funds available sooner or impose a longer delay.” Whether a bank’s disclosure must reflect specific hold amounts depends authorized by the business to make such transfers from the business account, and your bank is unaware of any wrongdoing by the customer in transferring business funds to a personal account (which could have on the availability policy followed by that bank. For example, “a bank that makes deposited funds available for withdrawal on the business day following the day of deposit need simply disclose that deposited funds will be available for withdrawal on the first business day after the day of deposit, the bank’s business days, and when deposits are considered received.” Banks with such an availability policy may use Regulation CC’s Model C-1 (next-day availability) policy disclosure, which does not reference specific hold amounts. However, banks that have a policy of routinely delaying the time when deposited funds are available for withdrawal on a blanket basis or have a combination of next-day availability and blanket delays would need more detailed disclosures that reference hold amounts (such as those reflected in Model C-2 and Model C-3). several innocent explanations, such as to pay a salary or other expenses). We also recommend reviewing the account agreement for your business account to determine whether such

The new Regulation CC changes that became effective July 1 modified the amounts that must be made available during holds and required notification to our customers within thirty days of the change. However, our initial disclosures do not reference the dollar amounts of available funds during various holds. Do we need to begin disclosing these hold amounts to our customers, or may we simply notify them that the hold amounts have changed and are available if they wish to view them? Currently, we use the basic funds availability policy (Model C-1) in Appendix C to Regulation CC.

transfers are allowed. Regarding the new Regulation CC dollar amounts that took effect July 1, 2020, Regulation CC states that a “bank shall send a notice to holders of consumer accounts at least 30 days before implementing a change to the bank’s availability policy regarding such accounts, except that a change that expedites the availability of funds may be disclosed not later than 30 days after implementation.” Since the funds banks must make available to customers during holds is increasing, we agree that you may provide notice of the change within thirty days after the change is implemented. We also agree that you do not need to include the dollar amounts of the funds available during holds in your notice, since they are not referenced in your availability policy.

QUESTION We paid five checks that turned out to be forgeries for a business customer. Our customer notified us of the forgeries shortly after receiving their account statement, and we returned them to the depository bank, but the returns were after the midnight deadline. Our account agreement provides that we are not responsible for any unauthorized signature or alteration that would not be identified by a reasonable inspection of the item. Our account agreement does not mention or offer specific fraud detection services. Can we avoid liability on this basis?

ANSWER We would not recommend relying on your account agreement to avoid liability to a customer for forged checks that your customer reported in a timely manner, but we note that we cannot provide legal advice. We recommend working with bank counsel to review and analyze your account agreement’s provisions with respect to the customer’s responsibility for fraudulent items in light of the Uniform Commercial Code (UCC) provisions and case law discussed below.

Your customer is likely entitled to reimbursement from your bank for the forged checks since the customer notified you of the fraud with “reasonable promptness,” and your question does not suggest that your customer was negligent in a way that contributed to the forgeries. Under the Uniform Commercial Code (UCC), your customer generally should not be held liable on a check unless it signed the check, and a check with a forged drawer’s signature or indorsement is not properly payable. The UCC does permit account agreements to vary the effect of its provisions, and Illinois courts have allowed banks and customers to agree to narrow the timeframe that customers have to report unauthorized payments. However, the UCC also expressly provides that a bank cannot disclaim its responsibility for its lack of good faith or failure to exercise ordinary care. Additionally, any variations in an agreement must not be “manifestly unreasonable.”

While we are not aware of any Illinois case law on this point, at least two out-of-state courts have examined the validity of provisions in account agreements that disclaim a bank’s liability for fraudulent checks.

In a Minnesota case, the court concluded that a bank’s deposit agreement could require a customer to disclaim liability for fraudulent checks when Positive Pay (a fraud detection service) was offered to and declined by its customer. The bank in that case was not required to reimburse its customer. However, in a similar case before a federal appellate court, the court concluded that an account agreement improperly disclaimed the bank’s duties to act in good faith and exercise ordinary care. In that case, the account agreement absolved the bank of liability for any fraudulent transactions when the customer declined to enroll in nondescript anti-fraud products designed to discover or prevent the type of fraud at issue.

Based on the reasoning in these cases, it does not appear that your bank could rely on the disclaimer of liability in your account agreement to avoid liability for the timely-reported forged checks. While we have not reviewed your bank’s account agreement, it appears that it did not mention or offer fraud detection services to your customer—a fact that was present in both of the cases discussed above, only one of which found in the bank’s favor.

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Note: This information does not constitute legal advice. You should consult bank counsel for legal advice, even if the facts are similar to those discussed above.