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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
{{2-27-98 p.4984.06}}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
{{2-27-98 p.4984.07}}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
{{2-27-98 p.4984.08}}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.
{{2-27-98 p.4984.09}}
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
{{2-27-98 p.4984.10}}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
{{2-27-98 p.4984.11}}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
{{2-27-98 p.4984.12}}(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
{{2-27-98 p.4984.13}}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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