Checking Out Of The Exception To 3-104: Why Parties Should Be Able to Negotiate Whether Checks Should Be Payable On Demand

Abstract

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.