Negotiable Instruments and Check Processing Flashcards

What information is required on a check for it to be considered a valid negotiable instrument under the UCC?

Answer: Unconditional order to pay, specific dollar amount, and maker's signature

Under UCC Article 3, a valid check must be an unconditional written order to pay a fixed amount of money, signed by the drawer (maker).

A 'substitute check' created under Check 21 must contain which statement?

Answer: 'This is a legal copy of your check. You can use it the same way you would use the original check.'

Check 21 requires that substitute checks bear the specific legal equivalency statement confirming they are legally the same as the original paper check.

When a customer presents a third-party check (made out to someone else and signed over), what should a teller do first?

Answer: Verify the endorsement and follow bank policy for third-party checks

Third-party checks carry higher fraud risk, so tellers must verify the endorsement is complete and follow their bank's specific policies, which may include additional ID verification.

What is 'check kiting'?

Answer: Exploiting the float between two accounts to fraudulently inflate balances

Check kiting is a form of fraud where a person exploits processing float by writing checks between accounts with insufficient funds to artificially inflate balances.

Which endorsement allows a payee to sign a check over to a third party?

Answer: Special (full) endorsement

A special or full endorsement names a specific new payee ('Pay to the order of [Name]'), transferring the check to a third party.

If a customer's check is returned marked 'Account Closed,' what does this mean?

Answer: The account on which the check was drawn no longer exists

An 'Account Closed' return means the drawer's account was closed before or after the check was written, making payment impossible.