The title of this article is taken from a recent webinar offered by the KBA. These three words are an apt description of what banks, particularly community banks, are facing today. FINCEN recently reported that SARs filed on check fraud increased by nearly 500% over five years, while the number of checks written today is only 20% of what it was 30 years ago.
Kentucky took a significant step to protect community banks when it passed the most recent amendments to the UCC. The amendments included non-uniform language to allow banks that must sue to collect on presentment warranties, most often from money center banks, to collect reasonable attorneys’ fees in addition to the face amount of the check, interest, and costs. Banks that previously ignored presentment warranty claims from Kentucky’s community banks on altered checks are now more frequently and timely paying those claims.
But there is much more to do. Check fraud was the beginning of the crisis. The fraudsters are increasingly moving into wire fraud that usually involves larger numbers. This development has banks talking about “payment fraud” as opposed to only check fraud.
Technology and the crooks are always ahead of the law but amendments to UCC Articles 3 (negotiable instruments), 4 (bank deposits and collections), and 4A (funds transfers) are on the way. The last significant amendments to these UCC Articles were in 1990.
The Uniform Commercial Code is a joint product of the Uniform Law Commission and the American Law Institute. As chair of the ULC’s UCC Committee, I began advocating over a year ago for a study/drafting committee to amend Articles 3, 4, and 4A to better deal with payment fraud. In January, the governing bodies of the ULC and ALI approved the appointment of a committee that is now being formed.
Those of us involved in the effort to amend the UCC know we must coordinate with the FRB in updating Reg. CC. An example is the last amendments to Reg. CC, effective January 1, 2019, allocate the loss for altered checks to the depository bank, and on counterfeit checks to the drawee bank. The rationale being the depository bank, in the age of check truncation, is the only bank that sees the paper check, and the drawee bank has the responsibility of ensuring the check bears an authorized drawer’s signature. But neither Reg. CC nor the UCC now deal with a real check that has been fully washed.
Possible Revisions to the UCC include:
- A clear definition of altered and counterfeit checks.
- Standardization of how to make a presentment warranty claim on a depository bank for an altered check (possibly a model form).
- Setting a reasonable time to respond to properly submitted alteration claims.
- Giving a payor bank a specific period to recredit a depositor’s account for a prima facie valid claim of an improperly paid check.
- Incentives for depository and drawee banks to use commercially reasonable fraud detection software.
- Use of attorneys’ fees to incentivize banks to comply with statutory obligations.
- Special rules for mobile deposits (through which much fraud takes place).
- The obligations of a receiving bank on a funds transfer when there is a material mismatch between the name on the transfer and the name on the account.
You are on the front lines of the fight to combat payment fraud. I solicit your suggestions as we undertake this significant effort to bring the law up to speed with exploding check (and wire) fraud.
Contact Morgan Pottinger McGarvey
Contact John McGarvey
This article was also featured in the Q1 2026 issue of Kentucky Banker magazine.
