Thursday, April 18, 2024

December 2010 Legal Update

OBA’s Legal Department Introduces New Frequently Asked Questions Feature!

Recent Case Sanctions Fraud Loss Shifting Provision in Commercial Deposit Account Agreements

Compliance Dates Roundup

OBA’s Legal Department Introduces New Frequently Asked Questions Feature!

The Legal Department is excited to announce a BRAND NEW FEATURE available to our members – Legal Frequently Asked Questions! Our first set of questions deals with recurring questions we receive about what to do when a customer dies. We really think this new section is pretty slick and will be a valuable asset to our member banks!
To access this new feature, go to, and click on Legal FAQs. This feature is password protected, with the same sign-on and password used to access the online version of the Legal Update. If you need help accessing this feature, please call and ask for Byron Linkous or Pauli Loeffler. We will be adding new sets of FAQs periodically. Coming soon are FAQs regarding dealing with revocable and irrevocable trusts, and questions regarding customers’ use of powers of attorney. 
Our hope is to provide a central repository of information that will in many instances provide faster answers to many of your everyday questions. Of course, this service is at no extra cost to members of the OBA. We would love any comments or suggestions you may have about the topics covered and/or ideas for new topics.
Recent Case Sanctions Fraud Loss Shifting Provision in Commercial Deposit Account Agreements
Byron’s Quick Hit: There is a powerful tool at the disposal of banks to mitigate the risk of loss to the bank resulting from fraud: the account agreement. Within the confines of reasonableness, UCC § 4-103 allows the bank and its customer to ALTER default liability rules contained within the UCC. A recent case decided in Minnesota provides valuable insight into the power and limits of § 4-103. In the case, a bank prevailed against a claim made by its customer that a check in excess of $150,000 was altered (the payee was changed), and thus not properly payable under UCC § 4-401(a). The bank did so by (i) making a powerful fraud prevention program known as “Positive Pay” available to its commercial customers; and (ii) requiring in the account agreement that the customer implement such fraud prevention technology and that failure to do so would cause the risk of fraud loss to fall solely upon the commercial customer.
                This case serves as a reminder of the powerful tool that is available to banks to prevent fraud before it happens, and in certain circumstances to shift losses to the customer that would clearly otherwise fall on the bank under the default provisions of the UCC. In the wake of this decision, banks should review their commercial and consumer account agreements to ensure they have taken prudent steps to protect themselves and their customers against fraud losses.
In today’s environment, most bankers have learned more about fraud schemes and fraudsters than they ever wanted to know. Banks are in a constant struggle to stay one step ahead of the thieves. Sometimes, a bank’s proactive efforts to stop fraud before it happens can stop losses for both the bank and its customers. A recent case decided by the United States District Court in Minnesota brings a ray of sunshine on our sometimes gloomy regulatory landscape and needed attention to a technique that can pay huge dividends to banks who take advantage of it: shifting the risk of loss for check fraud to the bank’s customer, where the bank makes fraud-prevention tools available to its customer, and insists (through its account agreement) that the customer use the tools available to it.
                In Cincinnati Ins. Co. v. Wachovia Bank, 2010 WL 2777478 (D. Minn. 2010), the federal district court for the State of Minnesota (interpreting Pennsylvania law), held that the commercial account agreement between Wachovia and its customer successfully shifted the risk of loss for an altered check written by its customer in the amount of $153,856.46. In this case, (i) Wachovia Bank made a widely-used security product known as “Positive Pay” available to its customers; (ii) Wachovia’s account agreement provided that if the customer refused to use available security products, the risk of loss for check fraud would shift to the customer; (iii) the customer failed to use “Positive Pay”; and (iv) Wachovia was able to show that if the customer had used Positive Pay, the loss would have been prevented. It is worth a close look at this decision, as it reiterates some important tools available to banks to minimize fraud losses under the Uniform Commercial Code (“UCC”). NOTE: The Wachovia decision is not an officially published decision of the court. Further, it would not be binding precedent within Oklahoma in any event. Nevertheless, this case presents an excellent evaluation of certain provisions of the UCC which Oklahoma bankers can and should use to minimize fraud losses.
What Happened in Wachovia?
1.     Wachovia Bank opened a commercial account for its customer, “Schultz Foods.” Including the fraud that was the subject of the case, Schultz Foods had been the victim of check fraud on four separate occasions. On the three prior occasions, Wachovia absorbed all losses related to the check fraud. Technical Note: Schultz Foods was not the named plaintiff in the case, rather its insurer, who had paid the loss to Schultz in exchange for the transfer of Schultz’s rights related to the loss, was seeking to recover against Wachovia. Under these circumstances the insurer “stands in the same shoes” as its insured. For purposes of this article, I am referring to the rights as between Wachovia and its customer, Schultz Foods. This is appropriate, as the court was concerned with determining the rights of Wachovia and its customer.
2.     In 2005, Schultz Foods issued a check payable to one of its vendors in the amount of $153,856.46. Through no apparent fault of its own or of the intended payee, the check was intercepted by a third-party fraudster. As part of a “washing” scam, the check thieves removed the name of the intended payee and substituted a new payee, an individual who was evidently an unwitting accomplice. The thieves had the new “payee” deposit the altered check in his account and later had him wire the funds out to an account in Singapore. The thieves “took the money and ran.” Not having been paid, the rightful payee still had a right to be paid by Schultz Foods.
3.     When the fraud loss was discovered, Schultz Foods demanded that Wachovia re-credit its account for the full amount of the loss, claiming that the item was not properly payable under UCC § 4-401(a). Conversely, Wachovia insisted that the account agreement between itself and Schultz Foods shifted any fraud loss to the customer where Wachovia made a fraud-prevention program available to its commercial customers known as “Positive Pay.” Further, the account agreement provided that if the customer failed to implement the fraud prevention tools made available by Wachovia, that the risk of fraud loss was shifted fully to the customer. On the three previous check fraud occasions, Wachovia had suggested that Schultz Foods close its account and implement Positive Pay on two occasions. Schultz Foods had in fact opted to close its account and open a new one when suggested by Wachovia, but never implemented Positive Pay.
4.     Many readers of this article already know about and may already use Positive Pay. Positive Pay is a software program that permits a customer to transmit pertinent information to their bank about every check that the customer issues, including (i) check number; (ii) the amount of the check; and (iii) the payee of the check (Note: my understanding is that including the “payee line” on the information submitted and compared through Positive Pay is an extra feature with additional costs. For the reasons discussed in this article, if possible, it is highly advisable to include this feature). Use of Positive Pay enables the bank to compare information that it has previously received from its customer to checks that come through for payment. If, for example, the amount of a check that is presented for payment to the bank is greater than the amount of the check, as shown by the customer through Positive Pay, the Positive Pay program will alert the bank to this inconsistency and afford the opportunity to inquire with its customer and/or return the item within its Midnight Deadline. Likewise, as in Wachovia, Positive Pay can enable the bank to compare its customer’s intended payee with the payee as presented to the bank. Without a tool like Positive Pay, a bank will rarely have a chance of identifying a forged or altered check, because with a well-done forgery or alteration, a bank cannot know if a particular check was issued by its customer, was issued to the payee appearing on the check, or was issued in the amount that appears on the check, even with a visual inspection. 
5.     Pertinent provisions of the account agreement between Wachovia and its customer included the following provisions, each of which was discussed and relied upon by the court:
a.     Section 12 of the agreement listed a non-exhaustive list of precautions that bank customers “can and should take to decrease the risk of unauthorized transactions.” All of these measures were ones that a customer could take independent of any product or tool made available by the bank. These included: (i) protecting the secrecy of passwords; (ii) promptly reviewing bank statements for unauthorized activity; and (iii) immediately reporting any suspicious or fraudulent activity to the bank. In addition to the “precautions” listed, Section 12 stated that Wachovia would make available to its customers “certain products and services that are designed to detect and/or deter check fraud.” 
b.     Importantly, Section 12 also had a conditional release of Wachovia’s liability if a customer failed to take appropriate precautions or failed to take advantage of the products and services made available by Wachovia. The release language read:
You agree that if you fail to implement any of these products or services, or you fail to follow these and other precautions reasonable for your particular circumstances, you will be precluded from asserting any claims against [the bank] for paying any unauthorized, altered, counterfeit or other fraudulent item that such product, service, or precaution was designed to detect or deter, and we will not be required to re-credit your account or otherwise have any liability for paying such items.
c.     In addition to Section 12, Section 25E of the deposit agreement contained almost identical language. This section stated that the customer acknowledged that Wachovia had made available “treasury services designed to reduce the likelihood that a fraudulent, unauthorized or altered check or other item will be paid.” The customer further acknowledged that failure to use such “treasury services” could substantially increase the likelihood of fraud. Section 25E contained a virtually identical conditional release of Wachovia’s liability as contained in Section 12.
d.     Section 46 of the deposit agreement contained a “severability/savings clause,” as follows:
If there is any conflict between this Agreement and applicable federal or state law, this Agreement will be considered changed to the extent necessary to comply with the law. If any provision of this Agreement is declared to be invalid, unenforceable or illegal, that part will not affect the validity of other provisions.
e.     Finally, Section 43 of the deposit agreement provided an “anti-waiver” provision, which stated:
WAIVER OF RIGHTS BY THE BANK. We reserve the right to waive the enforcement of any of the terms of this Agreement with respect to any transaction or series of transactions. Any such waiver will not affect our right to enforce any of our rights with respect to other customers or to enforce any of our rights with respect to later transactions with you and is not sufficient to modify the terms and conditions of this Agreement.
6.     As stated above, despite having had three previous incidents of check fraud, Schultz Foods had not implemented Positive Pay. The case record showed that it was feasible for the customer to implement the Positive Pay program with its existing systems for less than $500. Further, although the exact fees are not stated, the Wachovia court indicated that there were “modest monthly and per-check fees” that the customer would have been charged for its use of the Positive Pay program.
Wachovia Court’s Discussion of Applicable UCC Provisions
                The rights of banks and their customers, as between themselves, are generally determined under Article 4 of the Uniform Commercial Code. Two primary Sections of the UCC were cited by the Wachovia court: UCC §§ 4-401(a) and 4-103. Although the Wachovia court was interpreting the UCC as enacted in Pennsylvania, the identical provisions are part of the UCC as enacted in Oklahoma at 12A Okla. Stat §§ 4-401(a) and 4-103. 
Article 4 contains numerous default rules to define the obligations between a bank and its customer. One example, discussed below, is UCC § 4-401. However, Section 4-103 provides an incredibly important overarching rule: within certain limitations, a bank and its customer can agree to change the default rules that would otherwise apply under Article 4. It is difficult to overstate the importance of § 4-103. While the UCC may provide generally applicable rules that will cause a bank to suffer severe losses at times, in many cases, the bank and its customer can lessen or completely reverse the effect of these provisions. UCC § 4-103 states:
§ 4-103. Variation by Agreement – Measure of Damages – Certain Action Constituting Ordinary Care
(a) The effect of the provisions of this article [UCC Article 4] may be varied by agreement, but the parties to the agreement cannot disclaim a bank’s responsibility for its lack of good faith or failure to exercise ordinary care or limit the measure of damages for the lack or failure; however, the parties may determine by agreement the standards by which the bank’s responsibility is to be measured if those standards are not manifestly unreasonable.
(b) Federal Reserve regulations and operating circulars, clearing-house rules, and the like have the effect of agreements under subsection (a) of this section, whether or not specifically assented to by all parties interested in items handled.
(c) Action or non-action approved by this article or pursuant to Federal Reserve regulations or operating circulars is the exercise of ordinary care and, in the absence of special instructions, action or non-action consistent with clearing-house rules and the like or with a general banking usage not disapproved by this article, is prima facie the exercise of ordinary care.
(d) The specification or approval of certain procedures by this article is not disapproval of other procedures that may be reasonable under the circumstances.
(e) The measure of damages for failure to exercise ordinary care in handling an item is the amount of the item reduced by an amount that could not have been realized by the exercise of ordinary care. If there is also bad faith it includes any other damages the party suffered as a proximate consequence.
As discussed below, the Wachovia court relied heavily on § 4-103 in reaching the decision that the loss was shifted to the customer as a result of the account agreement between Wachovia and its customer.
 UCC § 4-401(a) is the source of the general rule that a bank may not charge an item against its customer unless the item is “properly payable.” Specifically, UCC § 4-401(a) states:
A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank.
Under the facts given in Wachovia, the Wachovia court stated:
Ordinarily, if a bank charges a customer’s account for a check that is not properly payable-for example, a check that has been forged and therefore has not been authorized by the customer-the bank will be liable to the customer for the loss under § 4-401(a).
Wachovia, 2010 WL 2777478, at *3. However, the court went on to say:
But this is merely a default rule. Section 4-103(a) of the UCC … permits a bank and their customers to agree to a different rule, except that an agreement between a bank and a customer “cannot disclaim the responsibility of a bank for its lack of good faith or failure to exercise ordinary care.”
Id. (Emphasis added). 
                Given that Schultz Foods had made the check payable to a party who did not receive it (due to alteration of the check by thieves), the Wachovia court had no trouble in determining that the check in question was not “properly payable” under § 4-401(a), and that “absent an agreement to the contrary,” Wachovia would be liable to its customer for charging the unauthorized check against its customer’s account. Id. 
                A reading of the applicable provisions of the Wachovia account agreement leaves little doubt that it was drafted broadly enough on its face to relieve Wachovia of liability to its customer. However, before ultimately agreeing that under the facts of the case, the account agreement successfully shifted liability for the fraud losses to the customer, the Wachovia court had to deal with several attacks made under the applicable statutory language on behalf of Schultz Foods. While some of these arguments were easy to dismiss, others were closer calls, and provide important lessons for banks that desire to take full advantage of the authority provided by the UCC to limit the liability of the bank. 
The Customer’s Arguments against Enforcement of the Account Agreement:
1.     Section 4-401(a) provides for “strict liability” against the bank for unauthorized items. “Strict liability” is a legal concept that makes a party liable regardless of whether the party is at fault. As discussed above, the Wachovia court had no trouble finding that despite the fact that the default rule under UCC § 4-401 is that a bank will be liable to its customer for unauthorized or altered items, banks and their customers may nevertheless agree to a different rule or standards, within certain limitations, that may place a fraud loss on the bank’s customer.
2.     The release given to Wachovia under the account agreement was far more broad than allowed under § 4-103, and was therefore unenforceable. Importantly, although § 4-103 allows parties to change the default rules provided in Article 4, it does not do so without limitation. For example, under § 4-103(a), the parties “cannot disclaim the responsibility of a bank for its lack of good faith or failure to exercise ordinary care.” 
The customer in Wachovia DID NOT argue that Wachovia failed to exercise ordinary care. In this regard, the fraudsters’ alteration of the check was well-done. It was not readily apparent that the check had been altered. Thus, even with a physical inspection of the check, Wachovia would not have known that the check was not written to the original payee. As its customer had not implemented the Positive Pay program, Wachovia had no contrary information and could not have known the check was not properly payable. Rather, Wachovia’s customer argued that because the release language was overly broad, it should be found to be invalid and unenforceable.
The court AGREED with Schultz Foods that the release provisions contained within the Wachovia account agreement would, read literally, protect Wachovia from liability for paying an unauthorized check even if Wachovia had failed to exercise ordinary care. Thus, the release language clearly went further than is allowed under UCC § 4-103(a). Fortunately for Wachovia, the court relied upon the “severability clause” quoted above to find that the release language contained within the account agreement could be limited to the proper scope. 
3.     The account agreement release provisions were unreasonable. Section 4-103 contains two separate “reasonableness” requirements on account agreements that attempt to vary the default rules of Article 4: 
(i)             4-103(a) forbids the parties to “disclaim the responsibility of a bank for its lack of good faith or failure to exercise ordinary care. … the parties may determine by agreement the standards by which the responsibility of the bank is to be measured if those standards are not manifestly unreasonable.” The Wachovia court summarized this provision as follows: “4-103(a) allows parties to agree to the standards by which a bank’s responsibility to exercise ordinary care will be measured, as long as the agreed-upon standards are not ‘manifestly unreasonable.’”
(ii)            4-103(d) provides that despite default procedures under Article 4, the bank and its customer may agree upon the use of other procedures “that may be reasonable under the circumstances.”
Ultimately, the court determined that the release provisions of the deposit agreement were not “manifestly unreasonable” and that they were “reasonable under the circumstances.” The Wachovia court listed two factors to consider in determining the reasonableness of requiring that a customer implement Positive Pay: (1) the technical feasibility of implementing Positive Pay, and (2) the cost of installing and participating in the program. Under the circumstances, the court found that it was feasible for the customer to implement Positive Pay (the customer so admitted). Further, the court found that the costs for the customer of installing Positive Pay (less than $500), and the “modest monthly and per-check fees” associated with participating in the program made the requirement of complying with the program reasonable. The court ultimately concluded that “In this case, the Positive Pay obligation imposed by the deposit agreement was unquestionably reasonable.” Id., at *9. 
4.     Wachovia’s prior acceptance of check losses, despite Schultz Foods’ failure to implement Positive Pay, acted to waive Wachovia’s right to enforce the release provisions. Courts will frequently look to the post-agreement conduct of the parties to interpret the parties’ understanding of the terms of the agreement and/or to modify the terms of the agreement. In Wachovia, the bank had failed to enforce the contract provisions as written on three previous occasions and had taken all the losses for the fraudulent activity on the customer’s account. The case does not reveal how great those losses were, but we can probably assume they were much less than the final instance. In order to defeat the argument that the account agreement had been modified as a result of the actions of the parties, the court relied upon the anti-waiver clause in the agreement quoted above.
By including the anti-waiver provision, Wachovia was able to defuse the argument that the customer had garnered an expectation that if it had any fraud loss, it would be covered by the bank. I would argue that this is consistent with how banks often deal with their customers: they put protective provisions in their account agreement and/or disclose account fees that the bank will charge for various services. Often times, however, these provisions are present to protect the bank from worst-case scenarios, like the loss in Wachovia. However, it is not at all unusual for a bank to agree to diverge from its rules as a customer-service issue, where the cost to the bank is not very large. In my opinion, this habit of bending the rules to the benefit of the customer is appropriate. However, without an anti-waiver provision, as was present in Wachovia, a bank has an increased risk of losing an argument that its prior course of practice defines the rights between the bank and its customer.
What Steps Should Your Bank Take to Protect Itself from Fraud Losses?
                The central lesson that I want our readers to garner from this article is that it pays to be diligent in your efforts at stopping fraud. Further, it is necessary and advisable to take advantage of one of the most powerful tools that can minimize a bank’s risk of loss to fraud: the account agreement. As Wachovia makes clear, a diligent bank can (i) assist their customer in heading off huge potential fraud losses by making fraud prevention programs available; and (ii) if the customer refuses to take advantage of tools made available by the bank, a bank can often shift the risk of loss, consistent with UCC § 4-103 to its customer, by use of a carefully-drafted account agreement.
1.     Implement Fraud Prevention Programs Like Positive Pay. Staying a step ahead of the thieves is an ongoing battle that will never stop. Let me make a quick plug for keeping tuned to advances in both what the crooks are doing and tools for fighting against crime, by taking advantage of the OBA’s fraud prevention programs, like Fraud Net ( and our crime-fighting leader, Elaine Dodd. I have said before and still believe that it is true: the greatest challenges facing bankers today (in no particular order) are (i) keeping up with legal and regulatory changes; and (ii) stopping losses from fraud.
This article is not intended to be an endorsement of Positive Pay or any other product. However, in today’s environment filled with fraud schemes, staying ahead of the fraudsters becomes more important every day. New products of this type become available often. Banks should frequently evaluate what products are available. To the extent banks can make these products available to their customers at a low cost, it is helpful to both the bank and the customer. As noted by the Wachovia court, it is not simply enough that a bank offer fraud prevention tools to its customers, a bank’s requirement that a customer use such a product must be reasonable in terms of the feasibility of using it and the costs of installing and participating. Thus, the easier to use and lower the costs that a bank can make such products available, the more likely that a requirement that a customer actually use such products will be found to be reasonable (and thus, enforceable).
It is noteworthy in this case that Wachovia had implemented the Positive Pay program, INCLUDING THE PAYEE LINE. It is my understanding that Positive Pay is offered with and without the payee line feature. However, it is clear that in Wachovia, Positive Pay would not have stopped the fraud without information on the intended payee (allowing comparison of the payee submitted to the bank by the customer with the payee on the check as presented to the bank). There is little doubt that the Wachovia court would not have shifted the loss to the customer unless Wachovia were able to show that the actual fraud in question would have been stopped had the customer taken advantage of the product. 
2.     Include Loss-Shifting and Other Necessary Provisions in Your Account Agreement.
How long has it been since your bank has done a thorough review of its account agreements? The Wachovia case demonstrates that perhaps the greatest fraud loss prevention tool in the arsenal of a bank is a good account agreement. Specifically, in many cases UCC § 4-103 sanctions the practice of the bank and its customer coming to agreement on terms and conditions that are contrary to the default provisions provided by Article 4 of the UCC.
Without each of the account agreement provisions contained in the Wachovia account agreement, Wachovia may have been forced to bear the loss of $153,856.46. Let’s briefly discuss each provision:
The Fraud Loss-Shifting Provisions. Arguably, the inclusion by Wachovia of “precautions” that customers should take (e.g., protection of passwords, etc.) was not necessary, since the UCC already provides that the negligence of a customer can reduce a bank’s liability in a forged or altered check situation. See UCC § 3-406, “Negligence Contributing to Forged Signature or Alteration of Instrument.” However, reminding customers of their obligations to watch their own house is important. Further, a bank may be able to effectively shift a greater degree of responsibility to its customer than may be provided under § 3-406. 
                Ultimately, the key to the bank in Wachovia was (i) making an effective fraud prevention tool available to its customer; and (ii) requiring in the account agreement that the customer use the product, at the risk of bearing the full loss for its failure to do so. 
“Severability” or “Savings” Clause. The court in Wachovia clearly believed that the account agreement was drafted too broadly in the favor of the bank. Yet, rather than throwing out the entire risk shifting provision as overly broad, the court limited the application to within permissible limits, as provided under the severability clause. A clause like this one should be present in every account agreement. 
A NOTE OF CAUTION: Banks should be careful not to rely too heavily on a severability or savings clause. The degree to which a court may allow such a clause to modify the terms of a written agreement is something that can vary widely across state lines. As discussed above, the Wachovia court was discussing and interpreting Pennsylvania law. However, it is possible that an Oklahoma court would be less willing to allow the parties to narrow the application of a clearly overbroad provision. Despite the fact that the UCC is supposed to be “uniform,” it is not always applied uniformly across state line. Thus, banks should not simply draft an account agreement as broadly in its favor as possible. Rather, banks should seek to draft reasonable loss-shifting provisions. For example, banks should not draft a loss-shifting provision so broadly that it could be read to relieve the bank of responsibility even if the bank “failed to exercise ordinary care.” Even with a savings or severability clause, a hostile court could simply decide to hold that the loss-shifting provision is wholly unenforceable, leaving the loss to fall completely on the bank as provided by UCC § 4-401(a).
Anti-Waiver Provision.  The court looked to the anti-waiver provision contained in the Wachovia account agreement to short-circuit the customer’s argument that because Wachovia had absorbed the losses from the three previous instances of check fraud, this had effectively refuted the terms of the account agreement and had established the rights and expectations of the customer. Again, it is a good idea to include such a clause in every account agreement.
3.     Other Provisions Banks Should Consider Using under Authority of UCC § 4-103.
The Wachovia case represents one way that some banks may not have been familiar with for shifting fraud loss. Banks should not forget that UCC § 4-103 is a broader rule that permits other measures that may minimize a bank’s risk of loss.
One account agreement provision that is widely used to minimize bank losses further than provided under the general rules under Article 4 of the UCC is one that reduces the customer’s inspection period provided under § 4-406(f).   This section states:
Without regard to care or lack of care of either the customer or the bank, a customer who does not within one (1) year after the statement or items made available to the customer … discover and report the customer’s unauthorized signature on or any alteration on the items is precluded from asserting against the bank the unauthorized signature or alteration.
Under the authority of UCC § 4-103, several courts have upheld account provisions, both in commercial and consumer settings, that limit a customer’s inspection time significantly: (i) to six months (Retail Health Commission v. Manufacturers Hanover Trust Co., 160 A.D.2d 47 (N.Y. 1990)); (ii) to thirty days (Qassemzadeh v. IBM Poughkeepsie Employees Fed. Credit Union, 167 A.D.2d 378 (N.Y. 1990)); (iii) to twenty days (Stowell v. Cloquet Co-Op Credit Union, 557 N.W.2d 567 (Minn. 1997)); (iv) and even to fourteen days (Borowski v. Firstar Bank Milwaukee, 579 N.W.2d 247 (Wis. Ct. App. 1998)). Banks that do not already do so, should expressly require in both their consumer and commercial account agreements that the customer inspect his statement and report any forgeries or alterations within a reasonable period of time, e.g., thirty days. Further, the agreement should provide that failure to do so will relieve the bank of liability for such forgery or alteration.
4.     Don’t Forget to Notify Your Customer of Account Agreement Changes.
Banks should not forget that for consumer accounts, Reg DD requires that any change in account terms that may “adversely affect the consumer” must be mailed to all affected consumer account holders. Under 12 C.F.R. § 230.5(a), the notice should specify the effective date of any changes and should be mailed or delivered at least 30 days prior to the effective date of such change. Although Reg DD does not apply to commercial-purpose accounts, banks should also provide notice to commercial account holders of any significant account agreement changes. 
CorrectionIn the September 2010 Legal Update, in the second article, titled “Interim Rule Requires New Disclosures for Consumer Mortgage Loans,” it incorrectly stated that the compliance deadline for enacting the new Reg Z requirements under 12 C.F.R. § 226.18(s) and (t) is January 1, 2011. This was inaccurate. The actual compliance deadline is January 30, 2011. This information has been corrected on the on-line version of the Legal Update and in Compliance Dates Roundup below. I apologize for any inconvenience or confusion this may have caused.
Compliance Dates Roundup
12/31/2010 – FDIC TAG Program Expires (for banks that did not opt out in April 2010) (See October 2010 Legal Update)
1/1/2011 – Deadline to Comply with New Final Rule for Notice of Transfer of Mortgage (See September 2010 Legal Update)
1/1/2011 – Deadline to Comply with Final Rule on Risk-Based Pricing (See October 2010 Legal Update)
1/1/2011 – Model Privacy Notices Safe-Harbor Under Reg P Changes to New Model Form (See November 2010 Legal Update)
1/3/2011 – Deadline to Display Updated FDIC Insurance Signage (See October 2010 Legal Update)
1/30/2011 – Deadline to Comply with New Reg Z Disclosures (§ 226.18 (s) and (t)) (See September 2010 Legal Update)
1/31/2011 – Optional Gift Card/General Use Prepaid Card Compliance Deadline under Reg E (extended from August 22, 2010) (See November 2010 Legal Update)
3/1/2011 – HMDA Annual Filings Are Due (applies to HMDA-banks only)
3/1/2011 – CRA Annual Filings Are Due
4/1/2011 – Deadline to Comply with New Final Rule Prohibiting Certain Loan Originator Compensation and Steering Practices. (See November 2010 Legal Update)