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4000 - Advisory Opinions


Question regarding the effect of a debit card Transaction for deposit insurance purposes

FDIC--97--3

April 1, 1997

William F. Kroener III

This is in response to your letter regarding a "debit card" developed by your client,                     . The debit card enables the depositors at various banks to charge purchases against the depositors' accounts. At the same time, these transactions will result in credits to the merchants' accounts at the merchants' banks. These debits and credits are cleared by MasterCard. Sometime following a debit card transaction, settlement will occur among the various banks in the client network.

You have requested advice regarding the effect of a debit card transaction for deposit insurance purposes. Specifically, you have asked how the FDIC would treat a transaction if one of the banks should fail on the day of the transaction. This subject was discussed with you at a meeting on September 5, 1996.

The first part of this letter sets forth the applicable deposit insurance rules and describes the application of these rules with respect to checks. A discussion of checks is relevant because a transaction effected through a debit card is similar to a transaction effected through a check. The second part of the letter applies the rules to debit card transactions. The third part analyzes the specific scenarios set forth in your letter. Any conclusions in this letter could be affected by the operation of any relevant agreements among the parties or any unusual facts (e.g., the unauthorized use of a debit card).

I. The Insurance of Checks

The relevant section of the FDIC's regulations, 12 C.F.R. § 330.3(i)(1), provides that the amount of a deposit for insurance purposes "is the balance of principal and interest unconditionally credited to the deposit account as of the date of default of the insured depository institution."1 Thus, the effect of a debit card transaction--for insurance purposes--will depend upon whether the transaction affects the amount "unconditionally credited" to either the cardholder's account (in the event of the failure of the cardholder's bank) or the merchant's account (in the event of the failure of the merchant's bank).

The FDIC applies 12 C.F.R. § 330.3(i)(1) in accordance with several general principles. Each of these principles is discussed in turn below.

1.  Following the Uniform Commercial Code. The FDIC's interpretation of the term "unconditionally credited" is consistent with the rules prescribed by the Uniform Commercial Code ("UCC").2 These rules were explained in FDIC Advisory Opinion 86-3 as follows:

A depositor who draws a check on his account does not thereby assign the funds in that account to the payee of the check. . . . Until the check is presented for payment and the bank becomes obligated for payment to the owner of the item, the deposit obligation is owed by the bank to its depositor. As such, it represents a proper insurance claim on the part of the depositor, together with any other deposits owned by that same depositor in the bank.

If the closed bank has, however, become obligated for payment of the items, the owners of the items are recognized as depositors, and the forwarding bank is recognized as the owner's agent to present the claims and receive the insurance payments.

FDIC Advisory Opinion 86–3 (January 28, 1986) (copy attached).3

Thus, in the case of checks, the insurable balance of a checking account is not reduced at the moment of a transaction (i.e., when the accountholder gives a check to a merchant). Rather, the account is reduced after the check is presented for payment to the accountholder's bank and that bank becomes legally "obligated" for payment on the check. At that time, the owner of the check (i.e., the merchant) becomes the insured depositor for the amount of the check. This result is consistent with 12 C.F.R. § 330.4(b)(4)(ii), which provides as follows:

Where an insured depository institution in default has become obligated for the payment of items forwarded for collection by a depository institution acting solely as agent, the FDIC will recognize the holders of such items for all purposes of claim for insured deposits to the same extent as if their name(s) and interest(s) were disclosed as depositors on the deposit account records of the insured depository institution, when such claim for insured deposits, if otherwise payable, has been established by the execution and delivery of prescribed forms. The FDIC will recognize such depository institution forwarding such items for the holders thereof as agent for such holders for the purpose of making an assignment to the FDIC of their rights against the insured depository institution in default and for the purpose of receiving payment on their behalf.

12 C.F.R. § 330.4(b)(4)(ii).

In summary, the key moment is when the bank becomes "obligated" for payment of the check. Under the UCC, such an obligation will exist if (1) the check is presented to and received by the bank upon which it is drawn; and (2) the bank does not return or dishonor the check prior to the "midnight deadline" (i.e., midnight of the second banking day following presentment). See UCC §§ 4--302, 4--301. If it does not return the check, the bank will charge the amount of the check against the customer's account. See UCC § 4--401. This process may be referred to as "posting." In this memorandum, the term "processing" also is used.

The processing of checks is discussed in greater detail below.

2.  Completing the Processing of Checks Upon the Failure of a Drawee Bank. In the interest of efficiency in the payment of insurance, the FDIC--after its appointment as receiver for a failed depository institution--will complete the processing of checks so as "to make the books of the institution current as of the close of business on the day of the closing." FDIC Advisory Opinion 95--2 (January 23, 1995) (copy attached). This practice is explained in FDIC Advisory Opinion 95--2 as follows:

[U]sually a financial institution is closed by its chartering authority at the end of the institution's normal business day, say, at 5:00 p.m. Assume that the institution's normal cutoff time is 2:00 p.m., and any items accepted for deposit after 2:00 p.m. would be credited the next business day. The Receiver will include the 2:00 p.m. to 5:00 p.m. work and process it as part of the last day's business as opposed to the institution's practice of crediting the items the next business day.

Next, if the incoming cash letter is received by the institution prior to its failure, it, too, will be posted. . . . [T]hat cash letter will be processed and posted to customer accounts assuming that the items are properly drawn and endorsed, and that there are sufficient funds in the customer's account to pay the items. There is no difference here between the Receiver's actions and normal banking practices. If an incoming cash letter were to arrive after the institution's failure, the cash letter would be returned intact to the presenter. One of the first of many actions taken by the Receiver is to notify the Federal Reserve and other correspondent banks that the institution has been closed, no further charges are to be made to its correspondent account (except normal return items presented within the recourse period), and that any incoming "on us" items are to be returned marked "drawee bank in receivership."

Id.4

As discussed above, the FDIC will complete the processing of checks received by the failed bank prior to failure. Such receipt--without revocation--will give rise to the bank's obligation to make payment on the check to the payee. This obligation is insurable as a deposit owned by the payee. See 12 C.F.R. § 330.4(b)(4)(ii).

The FDIC's policy is consistent with 12 C.F.R. § 229.39 (part of Regulation CC, implementing the Expedited Funds Availability Act). That section of the Federal Reserve regulations deals with the insolvency of banks. Under 12 C.F.R. § 229.39, a check coming into "the possession of a paying, collecting, depositary, or returning bank that suspends payment, and which is not paid, shall be returned by the receiver, trustee, or agent in charge of the closed bank to the bank or customer that transferred the check to the closed bank." 12 C.F.R. § 229.39(a) (emphasis added). In accordance with this rule, the FDIC will return any checks that will not be paid (through a payment of deposit insurance or otherwise).

The discussion above deals primarily with situations involving the failure of the paying or drawee bank. Another general principle can be illustrated by discussing the failure of the payee's bank (i.e., the depositary bank). This third general principle is discussed below.

3.  Determining the Finality of Payment Upon the Failure of a Depositary Bank. If a merchant deposits a customer's check into an account at the merchant's bank, that bank will make a provisional credit to the account. The credit will not become final until the customer's bank--after presentation as mentioned above--makes "final payment" on the check. The drafters of the UCC have described this process as follows:

Under current bank practice . . . banks make provisional settlement for items when they are first received and then await subsequent determination of whether the item will be finally paid [by the customer's bank] . . . . Statistically, this practice of settling provisionally first and then awaiting final payment is justified because the vast majority of such cash items are finally paid, with the result that in the great preponderance of cases, it becomes unnecessary for the banks making the provisional settlements to make any further entries. In due course the provisional settlements become final simply with the lapse of time. However, in those cases in which the item being collected is not finally paid or if for various reasons the bank making the provisional settlement does not itself receive final payment, provision is made . . . for the reversal of the provisional settlements, charge-back of provisional credits and the right to obtain refund.

UCC § 4--214, Comment 1.

Under this procedure, the amount of the deposit at the merchant's bank is not "unconditionally credited" to the merchant's account until the bank receives payment from the customer's bank. See UCC § 4--215. Thus, until that moment, the amount of the check will not represent part of the insured balance of the merchant's account under 12 C.F.R. § 330.3(i)(1). As previously discussed, 12 C.F.R. § 330.3(i)(1) provides that the amount of a deposit account--for insurance purposes--is the balance of principal and interest "unconditionally credited" to the account. In the absence of payment within a prescribed period, the provisional or conditional credit at the merchant's bank will be reversed.

In summary, the deposit insurance rules in the case of checks may be stated as follows:

(1)  A check given by a customer to a merchant will not result in an immediate reduction in the customer's account at the customer's bank. The reduction will not occur until the customer's bank has become "obligated" for the check after presentation and acceptance by the customer's bank without revocation. If the customer's bank fails before the presentation of the check, the FDIC will treat the amount of the check as part of the customer's account.

(2)  If the customer's bank fails after the presentation of the check, the FDIC will process the check so as to make the books of the bank current as of the date of failure. The unpaid check will be insured as a deposit owned by the payee. See 12 C.F.R. § 330.4(b)(4)(ii).

(3)  A check deposited by a merchant at the merchant's bank will result in a provisional credit to the merchant's account. If the merchant's bank fails before the check is paid by the customer's bank (i.e., the drawee bank), the FDIC will not treat the provisional credit as part of the insured balance of the merchant's account. See 12 C.F.R. § 330.3(i)(1).

(4)  If the merchant's bank fails after the check is paid by the customer's bank, the FDIC will recognize the amount of the check as part of the insured balance of the merchant's account.

Below, the deposit insurance rules are applied to debit card transactions.

II.  The Insurance of Debit Card Transactions

In Advisory Opinion 87--59 (July 7, 1987), the FDIC described its policy with respect to the payment of insurance on accounts affected by a debit card or "ATM" (automated teller machine) transaction. The policy was described as follows:

When an FDIC insured bank fails which is a member of an ATM network that is not "on line," it is the practice of the FDIC's liquidators to obtain the magnetic tape which reflects the "memo post items" for the day and run the tape to the accounts. The correspondent bank which clears for the network is contacted and authorized to settle the accounts between the banks in the network. In brief, under present practice, electronically generated debit instructions are treated as finally paid when initially entered onto the magnetic tape in conjunction with the customer's use of the ATM card, i.e., the process of posting is treated as complete as a charge has been entered to the customer's account.

*  *  *

[T]he FDIC is prepared to continue its present practice of treating the entry of an electronic debit instruction onto a magnetic tape as final payment in the absence of: (1) a bank or network representative or some other individual coming forward and establishing that the agreement of the parties requires otherwise, (2) state law to the contrary, or (3) some other complication such as an alleged unauthorized use of an ATM or debit card.

FDIC Advisory Opinion 87--59 (July 7, 1987) (copy attached).

The policy described above remains the policy of the FDIC but requires some clarification. Note, for example, that the policy described in the advisory opinion only addresses the issue of whether the FDIC will honor an electronic debit instruction at the cardholder's bank. It does not address the issue of how the FDIC will treat an electronic credit instruction at a failed merchant's bank.

The FDIC's policy with respect to debit card transactions is clarified below.

1.  Debit Instructions at the Cardholder's Bank. As explained in Advisory Opinion 87--59, the FDIC will honor an electronic debit instruction in the absence of a rule or law to the contrary if the instruction has been recorded on a magnetic tape. This policy assumes that the entry of the electronic instruction onto the tape will constitute receipt of the instruction by the cardholder's bank. Further, the policy assumes that such receipt will trigger an obligation on the part of the bank to honor the instruction (i.e., debit the account and pay the merchant). If these assumptions are accurate under the terms of the agreement among the parties and applicable state law, the FDIC will treat the balance of the cardholder's account as reduced by the amount of the transaction. At the same time, the FDIC will insure this amount to the party to whom the failed institution is obligated for payment (assuming payment has not been made prior to failure). This policy is consistent with the FDIC's policy of completing the processing of those checks received by the failed depository institution prior to failure.

The FDIC's policy is consistent with 12 C.F.R. § 330.3(i)(1), which provides that the amount of an account--for insurance purposes--is the amount "unconditionally credited" to the account. In the case of an electronic debit instruction binding on the bank prior to failure, the amount debited from an account--in accordance with the electronic instruction--does not remain credited to the account (either unconditionally or otherwise). This policy also is consistent with the FDIC's treatment of the payees of checks under 12 C.F.R. § 330.4(b)(4)(ii). As previously discussed, the payees of presented but unpaid checks are treated as insured depositors. Similarly, the beneficiaries of unpaid electronic debit instructions are treated as insured depositors. In both cases, the failed bank is obligated to make payment out of the funds in one of the bank's accounts. This obligation is the insured deposit.

2.  Credit Instructions at the Merchant's Bank. The section above describes when the FDIC will recognize the beneficiary of an electronic debit instruction--the merchant--as an insured depositor at the cardholder's bank. The merchant's deposit at the cardholder's bank will be discharged upon payment. Under Article 4A of the UCC, dealing with electronic and other forms of "funds transfers," payment may occur as follows:

If the sender [i.e., the customer's bank] and receiving bank [i.e., the merchant's bank] are members of a funds-transfer system that nets obligations multilaterally among participants, the receiving bank receives final settlement when settlement is complete in accordance with the rules of the system. The obligation of the sender to pay the amount of a payment order transmitted through the funds-transfer system [i.e., the electronic debit or payment instruction] may be satisfied, to the extent permitted by the rules of the system, by setting off and applying against the sender's obligation the right of the sender to receive payment from the receiving bank of the amount of any other payment order transmitted to the sender by the receiving bank through the funds-transfer system. The aggregate balance of obligations owed by each sender to each receiving bank in the funds-transfer system may be satisfied, to the extent permitted by the rules of the system, by setting off and applying against that balance the aggregate balance of obligations owed to the sender by other members of the system. The aggregate balance is determined after the right of setoff stated in the second sentence of this subsection has been exercised.

If two (2) banks transmit payment orders to each other under an agreement that settlement of the obligations of each bank to the other . . . will be made at the end of the day or other period, the total amount owed with respect to all orders transmitted by one (1) bank shall be set off against the total amount owed with respect to all orders transmitted by the other bank. To the extent of the setoff, each bank has made payment to the other.

UCC § 4A--403(2)--(3).
5

After settlement, as described above, the amount of the debit card transaction would form part of the merchant's account at the merchant's bank. Prior to settlement, however, any credit at the merchant's bank would be provisional or conditional. Hence, the credit would not form part of the insured balance of the merchant's account. This result is consistent with 12 C.F.R. § 330.3(i)(1), which provides that the amount of an account--for insurance purposes--is the amount "unconditionally credited" to the account. Also, this result is consistent with 12 C.F.R. § 229.10 (part of Regulation CC, implementing the Expedited Funds Availability Act). That section of the Federal Reserve regulations provides that an electronic payment is not "received" until the bank has received both "(i) Payment in actually and finally collected funds; and (ii) Information on the account and amount to be credited." 12 C.F.R. § 229.10(b)(2).

Settlement of an electronic funds transfer will occur on a "settlement date" as defined by applicable state law or by the relevant network rules or agreements. In accordance with the policy described above, the FDIC will honor an electronic credit instruction if the FDIC is appointed as receiver after the close of business on the settlement date. The FDIC will not be responsible for paying insurance on the credit, however, if the FDIC is appointed as receiver before the settlement date.

The importance of settlement is illustrated by FDIC v. European American Bank & Trust Co., 576 F. Supp. 950 (S.D.N.Y. 1983). That case involved the Clearing House Interpayment System ("CHIPS"). In the CHIPS electronic fund transfer system, an exchange of electronic debit and credit messages between the member banks was followed--on the next day--by settlement. Though debits occurred immediately, the court agreed with the FDIC that the deposit base of the debiting institution was not reduced for assessment purposes until settlement (i.e., payment on the electronic debit messages). See 576 F. Supp. at 955. This case supports the conclusion that the obligation of the debiting institution arising from an electronic debit instruction constitutes an insured deposit until the obligation is discharged through payment or settlement (though the case does not address the issue of ownership of the deposit for insurance purposes).

In summary, the deposit insurance rules in the case of debit card transactions may be stated as follows:

(1)  A debit card transaction will result in a reduction of the customer's account at the customer's bank when that bank has become obligated to pay the amount of the transaction to the merchant. The FDIC will assume (subject to the applicable state law or clearing house rules or network agreements) that the obligation arises when the electronic debit instruction is received by the customer's bank (e.g., the debit is entered onto the magnetic tape). If the debit instruction is not received on or before the date of the customer's bank's failure, the FDIC will treat the amount of the transaction as part of the customer's account.

(2)  If the customer's bank fails after receiving the electronic debit instruction, the FDIC will process the electronic instruction so as to make the books of the bank current as of the date of failure. The obligation represented by the unpaid instruction will be insured as a deposit owned by the beneficiary of the instruction (i.e., the merchant).

(3)  An electronic credit at the merchant's bank will be provisional until settlement. If the merchant's bank fails before settlement, the FDIC will not treat the provisional credit as part of the insured balance of the merchant's account.

(4)  If the merchant's bank fails on or after the settlement date, the FDIC will recognize the amount of the transaction as part of the insured balance of the merchant's account.

III.  Eight Scenarios

In your letter, you have described a number of scenarios involving debit card transactions. Each of these scenarios is discussed in turn below.

1.  An "On-Line" Transaction. In an "on-line" system, a debit card transaction results in an immediate debit to the customer's account without the entry of the transaction onto a magnetic tape. If the customer's bank fails on the same day, the FDIC would give effect to the debit. In other words, the FDIC would not insure the amount of the transaction as part of the customer's account. Rather, the FDIC would insure this amount to the merchant or beneficiary of the electronic payment instruction (assuming that the obligation is not paid through settlement or otherwise prior to the bank failure).

2.  Electronic Tape Received Before Bank Failure. Prior to its failure, the customer's bank receives an electronic tape from MasterCard. The tape reflects the debit card transaction. Before using the tape to debit the customer's account, the bank fails. Under these circumstances, unless a contrary result is mandated by the applicable clearing house or network rules, the FDIC would give effect to the transaction by debiting the amount of the transaction from the customer's account. At the same time, the FDIC would insure this amount to the merchant or beneficiary of the electronic payment instruction.

3.  Electronic Tape Received After Bank Failure. If the tape is received on the same day as the bank failure, and the entry of the transaction has triggered an obligation on the part of the customer's bank to honor the debit instruction under the applicable clearing house or network rules, then the FDIC would give effect to the transaction. Otherwise, the FDIC would return the tape without honoring the debit instruction.

4.  Chargeback. At the time of the bank failure, the customer's account includes a conditional credit (subject to the resolution of a disputed debit). The FDIC's treatment of this conditional credit (and disputed debit) would depend upon the circumstances. If the credit means that the funds at issue remain on deposit at the failed bank (i.e., if the disputed debit was not paid or settled by the bank prior to failure), then the FDIC might withhold insurance until the conditional credit becomes unconditional through the resolution of the dispute. Depending upon that resolution, the FDIC could pay insurance to (1) the customer; or (2) the merchant or other beneficiary or the electronic payment instruction (i.e., the disputed debit). On the other hand, if the conditional credit simply means that the disputed funds might be returned to the failed bank for return to the customer (i.e., if the disputed debit was paid or settled by the bank prior to failure), then the FDIC might refuse to pay insurance in the absence of deposited funds "unconditionally credited" to an account at the failed bank.

In the absence of additional information, the FDIC is unable to apply the insurance rules with any certainty. Under 12 C.F.R. § 330.3(i)(1), the applicable rule is that the amount of an insured deposit is the amount "unconditionally credited" to the account.

5.  Bill Payment. Pursuant to instructions from the customer, the customer's bank debits the customer's account for the purpose of paying a bill owed by the customer to the merchant. Prior to actual payment or settlement, however, the bank fails. Under these circumstances, the FDIC would give effect to the transaction by honoring the debit. At the same time, the FDIC would insure the amount of the debit to the merchant or beneficiary of the electronic payment instruction.

6.  A Check Against the Customer's Account. This scenario is unclear: you state that the customer instructs his/her bank to pay funds from his/her account to a merchant. Despite this instruction, the bank merely places a "hold" on the account; at the same time, client draws a check against the account and sends the check to the merchant's bank. You do not explain the reason or the authority under which client draws checks against the customer's account. In any event, the FDIC's policy with respect to checks (as previously explained) is to post a check to the failed bank's account if--and only if--the check is received prior to failure. Otherwise, the FDIC will return the check to the holder (i.e., payment will not be made on the check and the check will not be charged against the customer's account). The FDIC would adhere to this policy in the absence of some legal support for a contrary result.

7.  A Check Against a Settlement Account. The customer's account is debited prior to the bank failure in accordance with the customer's instructions. At the same time, a "settlement account" at the bank is credited. Client then draws a check against the settlement account and sends the check to the merchant.

In this scenario, the result would depend upon the ownership of the "settlement account." If the account is owned by the bank itself (i.e., if client is merely acting as the agent of the bank), then the check drawn by client would qualify as an official check. Therefore, assuming that the check is outstanding at the time of the bank failure, the check would be insured up to $100,000 limit as a deposit owned by the payee (i.e., the merchant). See 12 U.S.C. § 1813(1)(4) (for insurance purposes, the term "deposit" includes official checks issued by the failed bank); 12 C.F.R. § 330.4(b)(4)(i). If the account is owned by client, however, then the result would depend upon whether the check drawn against the account was presented for payment prior to the bank failure. If the check was presented to the failed bank but not paid prior to the bank failure, then the amount of the check would be insured to the payee (i.e., the merchant). If the check was not presented prior to the bank failure, then the amount of the check would be insured to client as part of the account. In any event, the amount of the transaction would not be insured as part of the customer's account because this amount would not remain credited to that account (unconditionally or otherwise).

8.  A Check Against Another Bank's Settlement Account. The customer instructs his/her bank to make payment from his/her account to a merchant. The amount of the transaction is submitted to client, which places the funds in a settlement account at a "settlement bank." Client then draws a check against the settlement account for the benefit of the merchant. Before the check is paid, the settlement bank fails.

As previously explained, the policy of the FDIC is to post checks to accounts if the checks have been received by the failed bank prior to failure. In accordance with this policy, the check would be insured to the merchant if the settlement bank received the check prior to failure. Otherwise, the check would be returned to the holder (i.e., the merchant) and the amount of the check would be insured as part of the settlement account. Insurance would be limited to $100,000 in aggregation with other accounts owned by the same depositor (in accordance with the FDIC's regulations). If client owns the account, then client would be insured as the depositor. If client is merely acting as an agent for another party, however, the FDIC would treat the party as the insured depositor. Such treatment would require disclosure of client agency status in accordance with the FDIC's recordkeeping rules at 12 C.F.R. § 330.4

In your letter, you propose that the funds be insured to the merchant under the rationale that the merchant is the beneficiary of the settlement account. The merchant cannot be insured as the depositor, however, unless the merchant is the owner--directly or through an agent--of the settlement account. See 12 C.F.R. § 330.3(h) ("In general, deposit insurance is for the benefit of the owner or owners of funds on deposit"); 12 C.F.R. § 330.6(a) ("Funds owned by a principal or principals and deposited into one or more deposit accounts in the name of an agent, custodian or nominee shall be insured to the same extent as if deposited in the name of the principal(s)"); 12 C.F.R. § 330.4 (setting forth certain recordkeeping requirements for agency accounts). Your description of the facts suggests that the merchant is not the owner of the account. Rather, the merchant is the owner of an unpaid check.

I hope that the information above is useful. If you would like to discuss any of these issues in further detail, please feel free to contact us.

1In pertinent part, the regulation provides as follows:
  The amount of a deposit is the balance of principal and interest unconditionally credited to the deposit account as of the date of default of the insured depository institution, plus the ascertainable amount of interest to that date, accrued at the contract rate . . . which the insured depository institution in default would have paid if the deposit had matured on that date and them  insured depository institution had not failed.2 C.F.R. § 330.3(i)(1).
Go back to Text

2The FDIC will apply the UCC provisions as adopted by the state in which the failed depository institution is located. Also, to the extent that the UCC is modified or preempted by federal law (such as Federal Reserve regulations), the FDIC will apply the federal law. Under these circumstances, the discussion above is necessarily general in nature. Go back to Text

3Since the issuance of Advisory Opinion 86--3, the UCC has been amended and the FDIC has revised its insurance regulations. For these reasons, in certain respects not relevant here, portions of Advisory Opinion 86--3 are obsolete. The obsolete portions do not include the statements quoted above. Go back to Text

4This advisory opinion acknowledges that "the FDIC . . . follows a collection/payment system which differs from the procedures described in the FDIC's Advisory Opinion FDIC--86--3 (January 28, 1986). . . ." Advisory Opinion 95--2 (January 23, 1995). The difference between the procedures contemplated by the UCC (described in Advisory Opinion 86--3) and the procedures employed by the FDIC (described in Advisory Opinion 95--2) are attributable to the FDIC's duty to pay insurance "as soon as possible." 12 U.S.C. § 1821(f)(1). For example, in the case of the failure of a merchant's bank, the FDIC may seek collection on unpaid, deposited checks after the failure of the bank even though "normal banking practice" might support the return of such checks. See UCC § 4--216. "In the interest of rapid payouts and in view of the minimal risk associated therewith, the FDIC made a policy decision many years ago to include such deposits [in lieu of] the time-consuming process of trying to reverse all deposits not yet finally paid." Advisory Opinion 95--2 (January 23, 1995). Even if this practice results in an uninsured balance in the merchant's account at the merchant's bank, the merchant will not be harmed because the FDIC as receiver will make the appropriate adjustments. Specifically, as explained in the advisory opinion, the receiver will cancel any receiver's certificate and make full payment to the merchant for the amount of any funds forwarded by the customer's bank to the merchant's bank after the failure of the latter bank. This adjustment is appropriate because the forwarded funds are not part of the receivership estate. Go back to Text

5Though Article 4A does not apply to consumer transactions governed by the Electronic Fund Transfer Act (15 U.S.C. § 1693 et seq.), payment nonetheless may occur through a settlement process such as the one described above. See UCC § 4A--108. Go back to Text


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