Draft-Passing TP Loses Appeal In The 7th

[notorial dissent]

Prof, this is quite true, the banks are acting as agents for the makers, and charging a pretty hefty fee for doing it, but they are collection items and do not pass through the FED for processing, the FED is in fact completely out of the loop, just as they would be on a foreign check.

The same goes for the drafts that you are speaking of. The bank has an agreement with the maker to cash the drafts for the customer, an “accommodation”, there may actually be funds on deposit, the bank may simple be holding money to cover the drafts, or a line of credit, whatever, it is up to them. The end result is that they either do or don’t pay the drafts depending upon funds available and their agreement, and they charge a serious handling fee for doing it, which is why they do it in the first place.

At one time, when all credit unions started allowing checking accounts, the accounts were actually draft accounts, and the checks were not "drawn" on a bank but were drafts on the credit union which were paid thru a bank. The statutes and rules governing credit union activities were ultimately changed.

NH Federal Credit Union still calls your accounts "Share Draft Checking" and "Share Draft Savings."

Which is partly due to habit and partly due to CU’s still being not quite fish nor fowl. Your account is based on you being a shareholder of the CU, and thus your equity, your share, is what the account is based on.

As Prof noted, in the beginning share drafts had to be drawn on an outside bank to be paid, then the CU’s got their own clearing system, and finally they turned it all over to the FED and quit messing around.

At this point the VISA and MC networks have gotten into the gift card business and have pretty well frozen out everything else. It is a lot cheaper to do all that electronically, cuts down on the paperwork, and if you don’t use it after a certain amount of time it defaults back to the issuers as an added bonus, along with all the money they get to sit on and make interest on before it is actually spent.

[LPC]

Prof, this is quite true, the banks are acting as agents for the makers, and charging a pretty hefty fee for doing it, but they are collection items and do not pass through the FED for processing, the FED is in fact completely out of the loop, just as they would be on a foreign check.

If the Fed is completely out of the loop, how does the check get from the depositing bank to the drawing bank?

You are suggesting that things that look and act like checks are separated into two piles, those that are really checks drawn on an actual account at the bank, and those that only look like checks and for which the bank is only acting as agent. The first pile goes through the Fed, and the second pile goes somewhere else. That seems impractical, inefficient, and unnecessary. It seems to me that the whole reason for having the bank act as agent is to simplify processing, and so that the draft could be treated just like any other check.

[Prof]

Prof, this is quite true, the banks are acting as agents for the makers, and charging a pretty hefty fee for doing it, but they are collection items and do not pass through the FED for processing, the FED is in fact completely out of the loop, just as they would be on a foreign check.

If the Fed is completely out of the loop, how does the check get from the depositing bank to the drawing bank?

You are suggesting that things that look and act like checks are separated into two piles, those that are really checks drawn on an actual account at the bank, and those that only look like checks and for which the bank is only acting as agent. The first pile goes through the Fed, and the second pile goes somewhere else. That seems impractical, inefficient, and unnecessary. It seems to me that the whole reason for having the bank act as agent is to simplify processing, and so that the draft could be treated just like any other check.

It has been a long time since I taught this stuff, and things have changed, I am sure, but there is basically a parallel systemoperated by vendors like Chase, not the Fed, and administered by the contractors to groups or pools of Credit Unions. I believe that the local clearing house does handle local items, but other items would be separated into pools and sent to either the Fed or to the CU vendor for processing. (At least, I think that is what used to happen.)

By the way, CU's do now have access to the Fed window under certain circumstances (I'm not sure what those circumstances are.)

[notorial dissent]

LPC, Not precisely. The pseudo check drafts should never actually ever get to the FED, since most of them will not have an actual routing number on them they would automatically be kicked out in processing before they ever get out of the bank they were deposited in. If they did get to the FED, they would be treated as an unprocessable item and returned to the bank of origin. The FED isn’t designed to handle anything but actual checks that have a valid routing number on them along with an account number. Depending upon what they are they would be dispersed from whatever internal operations center there is in the bank for those type of items. In some cases it results in them being stuffed in an envelope and sent as a collection item to the bank they are drawn on, and it is an expensive and cumbersome process.

At this juncture in time, CU checks are treated like any other item and pass through the FED, they are identifiable by the start sequence of their ABA/routing number, which means they clear through the FED. The old CU Clearing house operations were taken over completely by the FED some years, ago, and I no longer remember the date, but it was some time ago, if memory serves, about the time of the 1980's meltdown when a number of things like that were consolidated. As a transit item, a CU check is now no different than any other type of check for processing purposes.

I am not even sure at this point that the FED considers there to be much if any difference between a bank and a CU, as I remember, the distinctions have been pretty well whittled away over the last few years.