CBT Negotiable Instruments and Check Processing 1 — Questions and Answers
Question 1: Which federal law governs the check clearing process and establishes the rules for substitute checks in the US?
- Check Clearing for the 21st Century Act (Check 21) (Correct answer)
- Electronic Funds Transfer Act
- Uniform Commercial Code Article 4
- Expedited Funds Availability Act
Correct answer: Check Clearing for the 21st Century Act (Check 21)
Check 21, enacted in 2003, allows banks to process checks electronically and legally use substitute checks (IRDs) instead of original paper checks.
Question 2: A check that has been signed on the back by the payee to transfer it to another party is called a:
- Certified check
- Endorsed check (Correct answer)
- Cashier's check
- Substitute check
Correct answer: Endorsed check
Endorsing a check means the payee signs the back to authorize payment or transfer, with blank, restrictive, or special endorsement types available.
Question 3: What is a 'restrictive endorsement' on a check?
- Signing only your name on the back
- Writing 'For Deposit Only' with your account number (Correct answer)
- Signing the check over to a third party
- Stamping the check as certified
Correct answer: Writing 'For Deposit Only' with your account number
A restrictive endorsement limits how the check can be used, typically by writing 'For Deposit Only' followed by an account number to prevent cashing.
Question 4: Under the Expedited Funds Availability Act (Regulation CC), how quickly must banks make funds from local checks available?
- Same business day
- Next business day (Correct answer)
- Within 2 business days
- Within 5 business days
Correct answer: Next business day
Regulation CC generally requires that funds from local checks be made available by the next business day after the banking day of deposit.
Question 5: A check drawn on the bank's own funds and signed by a bank officer is called a:
- Money order
- Traveler's check
- Cashier's check (Correct answer)
- Certified check
Correct answer: Cashier's check
A cashier's check is issued by the bank itself, drawn on bank funds, making it a guaranteed form of payment more secure than a personal check.
Question 6: What does it mean when a check is 'postdated'?
- The check has expired and cannot be cashed
- The check bears a future date and should not be processed before that date (Correct answer)
- The check was returned due to insufficient funds
- The check has been certified by the issuing bank
Correct answer: The check bears a future date and should not be processed before that date
A postdated check carries a future date, and the payer intends it not to be cashed until that date arrives, though banks may process it earlier.
CBT Negotiable Instruments and Check Processing 1
Which federal law governs the check clearing process and establishes the rules for substitute checks in the US?