Consumer Banking and Payment Systems - A Short Overview

Homeowners in foreclosure are often woefully uninformed about the aspects of the banking and payment systems that exist in the country, as well as the regulations which govern those transactions. Especially in the case of servicing companies that lose payments or collection agencies which draft money unauthorized out of a bank account, a lack of awareness of these issues can cost consumers thousands of dollars or their homes.

The following are a few terms used in consumer banking transactions that many homeowners have come across but may not have understood what the acronyms stood for:

• ACH refers to the Automated Clearing House, which is a network designed to process electronic money transfers.
• Check 21 is a federal law which helps facilitate the transportation of bank checks via electronic image; it is designed to eliminate the use of the paper check in transactions.
• ECC refers to electronic check conversion, which is when a merchant takes a customer's check as a source document in an electronic funds transfer. The check is not used as a check, but only as the source document of an electronic transfer. The original check is actually destroyed or returned canceled to the consumer. This is a growing practice among merchants.
• EBT stands for Electronic Benefit Transfer and refers to needs-based government transfers. A federal mandate required the states to provide food stamps and other benefits via electronic transfer. This system typically uses debit or smart cards to fund a welfare recipient's account.

In the world of consumer banking and payments, there is a vast number of different types of transaction, whether on paper, electronically, over a land line or cell phone, over the internet, or through the use of various types of cards. In many instances, different laws govern each type of transaction, with some types of payments being regulated by numerous federal statutes. Only a sampling of these are listed below:

• Uniform Commercial Code
• Check 21 Act
• Regulation CC
• FTC Telemarketing Rule
• Electronic Fund Transfer Act
• National Automated Clearinghouses Association
• Truth in Lending Act
• Electronic Benefit Transfer
• Social Security and Supplemental Security Income
• EFT 99 Act

The law that most directly governs check transactions is the Uniform Commercial Code, Articles 3 and 4. Although some variations exist by state, the UCC has been adopted by every state. The articles were written with the intention of facilitating bank transfers and processing of checks -- not to provide protections to consumers. Other sections of the law and other regulations are written to protect banking customers.

Article 3 of the Uniform Commercial Code deals with negotiable instruments, which includes checks. There are two types of negotiable instruments: notes and drafts. A note is a promise to pay a loan or installment sales contract and include the promissory note borrowers sign when purchasing a home. A draft, on the other hand, is an order by the consumer for the bank to pay and includes checks that are payable on demand and which draw on an account at a particular bank.

Despite the UCC's intention of facilitating the processing of checks by banks, the regulation does impose a duty on all parties to act in good faith. To meet this duty, there is a two-part test. First, a subjective test asks if the bank acted dishonestly. Then, an objective test questions if the bank followed reasonable commercial standards. This duty does provide a level of protection to consumers if the bank did breach its duty of good faith.

The typical parties to a check transaction are the drawer who writes the check; the drawee bank which is ordered to pay the check; the payor bank which is what the drawee bank is referred to once the check is deposited; the payee to whom the check is made out to; and the holder which is the person or institution that is in possession of the check.

Over the next few weeks, many more articles will be added relating to consumer banking and payments, including payments to mortgage companies and issues relating to negotiable instruments such as promissory notes on real estate transactions. There are a whole list of protections that are available to borrowers in instances where they are required to make payments either via check or electronic transfer, and knowing about the payment and clearing systems in use in the country can help them defend against foreclosure or mortgage fraud.