Linda R. Crane
Abstracted from: Linda R. Crane, Checking out of the Exception to 3-104: Why Parties Should Be Able to Negotiate Whether Checks Should Be Payable on Demand, 3 Columbia Journal of Race and Law 73 (2013) (145 Footnotes)
Many aspects of American society, including its legal system, operate to the disadvantage of minorities. Obvious examples include inequities in our criminal justice system and in school funding. Much has been written on those and other topics. This article focuses on another example, specifically on how a sweeping change to an obscure banking rule regulating the check collection process has negatively affected consumers in general, and minority groups in particular.
U.S. check collections require a complex system comprised of a variety of institutions including commercial banks, savings and loans, savings banks, and credit unions, as well as the customers who rely upon them to collect payments from far and near. Traditionally, the check collection process, including the timing rules under U.C.C. Article Four, was inherently cumbersome and slow to honor the payee's right to receive immediate payment of funds from the paying bank. Frustration among payees, which grew due to not having their funds available fast enough because of delays that were inherent within the system, led lawmakers and others to reform the check collection timing rules.
It has now been more than twenty years since Congress passed the Expedited Funds Availability Act (EFAA), which empowered the Federal Reserve Board of Governors to regulate the speed with which commercial banks are required to make funds available to depositors after their checks were deposited for collection. There is evidence, however, that these reforms have had an negative impact on checking account customers as a whole, but in particular, a disproportionate impact on minority communities.
Specifically, by reducing the maximum amount of waiting time between the date of deposit and the date when funds are available to deposit customers, the reforms also reduced the time that the funds were available to the check-issuing consumer. Thus, in every checking transaction, checking account customers lost the benefit of the float that was built into every transaction under the traditional U.C.C. rules.
It is my thesis, therefore, that recent reforms in the timing rules that regulate the speed of the check collection process have indeed reduced the wait time for funds to be available, but have also resulted in increases in the appetite for various risky cash management alternatives by consumers to obtain the money that under old timing rules would stay in their deposit accounts for a longer period. Put another way, consumers who issued checks liked float, too! To address this problem, I will propose two recommendations that can provide a remedy for consumers, at their option. First, that the definition of “check” should be changed under both state and federal commercial law to remove the limitation that all checks are due on demand. Second, I propose that the federal check collection timing rules should be amended to require banks to honor checks that are payable on a definite due date just as they honor those that are payable on demand.
This Article is organized as follows:
Part II provides an overview of the check collections systems under the Uniform Commercial Code (U.C.C.) as well as the pre-reform timing of payment issues that persisted under the midnight deadline rules. Part III provides an overview and description of the characteristics of the new federal regulations that have been added to augment the state regulations. Particularly with respect to the new timing rules, it also provides a comparison of the operation of new timing rules to that of the traditional timing rules.
Part IV describes the changes in consumer behavior since the federal reforms went into effect, and posits that data revealing a dramatic increase in risky behavior by consumers, specifically and disproportionately among minority groups, show a connection between these behaviors and the reform of the check collection timing rules.
Part V contains two recommendations that provide a solution to the problems that the regulatory reforms have caused consumers. The first recommendation is that both the U.C.C. and Regulation CC's statutory definition of “check” should be amended to allow bank drafts to be treated like all other negotiable instruments, which are able to be payable either at a definite time or on demand--at the option of the parties at the time of the transaction. The second recommendation is for bank regulators to require banks to honor presentations of checks that are not payable on demand on the definite date in the future when they become due and payable.
Part VI provides a brief rebuttal to some potential objections that may be raised in response to the recommendations made in Section V.
Part VII is a brief summary and conclusion.
* * *
Check collection reform at the Federal level was necessary because of the length of time that it took to collect checks under the U.C.C., but because the traditional check is a demand instrument and, therefore, payment is due immediately to the person entitled to enforce it. An instrument that is due immediately should be capable of being paid without delay, and certainly in less than two weeks, or even one week. Demand instruments are due immediately, and yet it was impossible for payees to receive payment immediately using the traditional system of slow bank collections.
It is axiomatic to say that a law that is incapable of being enforced is bad law. Similarly, a right that cannot be enjoyed is a wrong. The reason the reforms to the check collection timing rules are problematic is not because they are not necessary--they were. Rather, the problem is that they were implemented as though they existed in a vacuum and without a full understanding of all of the formal and informal dynamics within the old system. I think that it is very important to consider that consumers were accustomed to, and continued to need, checks that were collected more slowly than they were under the new expedited collection regulations ushered in by the reforms. The Federal Reserve Governing Board failed to provide for the ongoing demand by consumers for a financial product that was a replacement for the old slow-to-be-collected check, but that was still a check, not something else! Specifically, consumers needed a check that was not payable immediately.
The controlling law governing the creation of different types of negotiable instruments, including checks, is still U.C.C. Article 3. Under Article 3, there is no requirement that checks must be payable on demand. Although they are never created as such, consumer transactions could be completed using checks that are issued on demand with due dates just as readily as when they are issued without due dates.
Clearly, consumers' behavior changed dramatically in ways that have hurt the U.S. economy and have contributed to the current economic crisis. These changes are traceable, at least in part, to consumer demand for short amounts of time delays between the time of their transaction and the time when payment is completed. What payday loan store operators seem to understand is that consumers need a relatively short amount of time before they have money in their accounts that is roughly equivalent to the time between their pay checks (in the United States, this is two weeks).
Banks in the United States have failed to compete with payday loan store operators even though it is clear that there is a huge demand for short-term financial relief in the checking account customer base. The solution is not to go back to a slower collection system for demand drafts, but a reasonable response that gives consideration to a variety of factors.
The first recommendation is to change the definition of “check” under the applicable U.C.C. and Federal regulations. The change would remove from the definition the exception that makes all checks “payable on demand.” Implementation of this recommendation would require the re-drafters of the U.C.C. and the Federal Reserve Governing Board to redefine “check” under the U.C.C. and Regulation CC, respectively, to accommodate the need to allow consumers to bargain for the inclusion of a due date term when issuing personal checks. Consequently, checks would become like all other negotiable instruments--payable either “on demand,” or “at a definite date” at the option of the parties. This approach is already authorized by existing U.S. laws of negotiable instruments. It would also match the expectations of parties who can negotiate freely to use or to not use the new payment instrument. It will provide many consumers with a much needed alternative to payday loan stores. The second recommendation is for Regulation CC to be amended to require banks to offer a new service that would recognize and honor the timing of payment terms of any check that had a due date just as easily as they do for checks that are payable on demand.
Both of these changes will go far to improve the prospects of consumers who are clearly demanding better alternatives and more flexible bank products.
Professor of Law, The John Marshall Law School, Chicago, Illinois. Northwestern University, J.D. /M.B.A.