Part 2: Checks, e-checks and the law.The e-check: Their option when one revokes ACH debits. The law and applicable regulations:
Stopping the ACH access may not be enough, since a lot of these payday loan contracts contain a clause that gives them the right to produce one or more electronic checks to access one's funds, a right they claim cannot be withdrawn. Or, can it? Let's start with the very definition of what a check is per the UCC (Uniform Commercial Code).
Checks: Definition of "check":
The typical UCC provision ( here the model UNIFORM COMMERCIAL CODE - ARTICLE 3 NEGOTIABLE INSTRUMENTS, Sec. 3-104(a), et seq. (
http://www.law.cornell.edu/ucc/3/3-104.html ), states that a "check" is "an unconditional promise or order to pay a fixed amount of money...on demand... at a definite time" and that is "payable on demand and drawn on a bank". These instruments include money orders, cashier's checks, and the like.
A check is a negotiable instrument; U.C.C. - ARTICLE 3 - NEGOTIABLE INSTRUMENTS
..PART 1. GENERAL PROVISIONS AND DEFINITIONS (
http://www.law.cornell.edu/ucc/3/3-108.html ) expand the definition of what is a "negotiable instrument' Sec. 3-108 states:
(a) A promise or order is "payable on demand" if it (i) states that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder, or (ii) does not state any time of payment.
(b) A promise or order is "payable at a definite time" if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued, subject to rights of (i) prepayment, (ii) acceleration, (iii) extension at the option of the holder, or (iv) extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event.
...
Now, that's all well and good, but why should one be concerned? After all, one can simply withdraw the right to present that check, right? Payday loan contracts give the impression that the right to create a substitute check is iron-clad since these almost always contain a clause that gives them the right to produce one or more electronic checks. This is a right they claim cannot be withdrawn by the consumer.
The FDIC says otherwise: Per Regulation E, the consumer has the right to stop payment/withdraw the right of the lender to produce such substitute check, just as they would be able to "stop payment" on a paper check and to do it at any time. This is a good thing, since these instruments--which do not require one's signature--leave one vunerable to fraud.
The Final Rule issued by the Board of Governors of the Federal Reserve System modified Regulation CC in 2006; this is how it reads:
"Remotely created checks" typically are created when the holder of a checking account authorizes a payee to draw a check on that account but does not actually sign the check. In place of the signature of the account-holder, the remotely created check generally bears a statement that the customer authorized the check or bears the customer's printed or typed name.
A remotely created check is subject to state law on negotiable instruments, specifically
Articles 3 and
4 of the Uniform Commercial Code (U.C.C.). Per the U.C.C., a bank that pays a check drawn on the account of one of its customers may charge a customer's account for a check only if the check is properly payable. A bank generally must recredit its customer?s account for the amount of any unauthorized check it pays.
If the payday lender puts forth a check the consumer did not authorize (or withdrew authorization for)?
Price v. Neal held that the bank who accepted the check for deposit is the one that must bear the loss should the drawer (the consumer whose bank account is being accessed here) not authorize the item.
But how does the bank know which remotely created draft is legit and which not? Unless the consumer tells them or the bank actually asks the account holder/consumer, they can't. This problem has been addressed, at least in part: The National Conference of Commissioners on Uniform State Laws and the American Law Institute, in 2002, approved revisions to Articles 3 and 4 of the U.C.C. that specifically address remotely created checks. These revisions put the burden on the lender, and their bank, to warrant (confirm that) the check is authorized.
Substitute checks are also dealt with in FDIC Regulation CC (see Subpart D: Substitute checks.)
http://www.fdic.gov/regulations/laws/rules/6500-3210.html#6500229.51Nonetheless, that electronic substitute check many a payday lender calls for in the contract if the ACH is withdrawn or fails can go through if one does not tell the bank to put a "stop payment" order on it. The lack of one's 'John Hancock' will not be enough: The UCC does not require A specific, unique physical (read: handwritten or facsimile) signature on it. It can be left up to the consumer to show that it was unauthorized or that authority was withdrawn to create such a draft prior to its issuance.
Why can the lender put through an e-check the borrower could not possibly have signed? The UCC indicates that the contract can state intent in its provisions. Sec. 3-110 (
http://www.law.cornell.edu/ucc/3/3-110.html ) states that such a draft is negotiable as part of the process of identifying the payee (the person or entity to whom the check is payable):
(a) The person to whom an instrument is initially payable is determined by the intent of the person, whether or not authorized, signing as, or in the name or behalf of, the issuer of the instrument. ...
(b) If the signature of the issuer of an instrument is made by automated means, such as a check-writing machine, the payee of the instrument is determined by the intent of the person who supplied the name or identification of the payee, whether or not authorized to do so.
Now, what about the little problem of the ACH debit and these substitute checks? The lender may argue that such will get around any withdrawal of such check creation authority and therefore they have one anyway. It does not; the definition of an EFT according to the FDIC excludes such a check from its provisions:
http://www.fdic.gov/regulations/laws/rules/6500-3200.html3(b) Electronic fund transfer:
Sec. 3(b)(1)2 Fund transfers not covered. The term electronic fund transfer does not include:
iii. A preauthorized check drawn by the financial institution on the consumer's account (such as an interest or other recurring payment to the consumer or another party), even if the check is computer-generated.
...
The reason that they can try to get away with it? Well, the information was given to them in order to get the loan in the first place and the information they need to create that draft? That's right, the routing number and bank account number. That, in turn, is enough to allow them to "fake it":
Paragraph 3(b)(2)--Electronic Fund Transfer Using Information From a Check
Sec. 2. Authorization to process a transaction as an EFT or as a check. In order to process a transaction as an EFT or alternatively as a check, the payee must obtain the consumer's authorization to do so. A payee may, at its option, specify the circumstances under which a check may not be converted to an EFT.
Note that such permission must be in writing; oral permission is not enough (so if there is no written contract, not unknown with certain Internet payday lenders, they are stuck):
...Preexisting authorizations. The financial institution need not require a new authorization before changing from paper-based to electronic debiting when the existing authorization does not specify that debiting is to occur electronically ...A new authorization also is not required when a successor institution begins collecting payments.
Your bank can say "Don't blame us!" if they put through that check and be off the hook; the lender's bank is liable for the violation:
2. ...The account-holding financial institution does not violate the regulation when a third-party payee fails to obtain the authorization in writing or fails to give a copy to the consumer; rather, it is the third-party payee that is in violation of the regulation.
If the lender never bothered to get your permission in writing? The lender is in violation:
3. Written authorization for preauthorized transfers. The requirement that preauthorized EFTs be authorized by the consumer "only by a writing" cannot be met by a payee's signing a written authorization on the consumer's behalf with only an oral authorization from the consumer.
Electronic signatures are valid if the consumer agrees:
5. ...The similarly authenticated standard permits signed, written authorizations to be provided electronically. The writing and signature requirements of this section are satisfied by complying with the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et seq., ...The authorization process should evidence the consumer's identity and assent to the authorization. The person that obtains the authorization must provide a copy of the terms of the authorization to the consumer ...Only the consumer may authorize the transfer and not, for example, a third-party merchant on behalf of the consumer.
More protection for the consumer: The consumer must authorize any such e-signature and transfer; the lender can't do it for them on their own.
The consumer also has the right to stop payment of an electronic check(see Rule 10(c ) ).
Next up: "Rollovers" as collection tool.
