Check Fraud and Allocation of Loss Under the Model Uniform Commercial Code

Written by David Park, Regulatory Compliance Counsel, NAFCU

Every now and then, the NAFCU Regulatory Compliance team receives a question from a credit union that relates to check fraud. A common scenario might include a check stolen and deposited after the thief forged the indorsement or the person the check is made out to (the payee). Another common situation might involve someone stealing blank checks, forging the signature of the accountholder (the drawer of the check) and cashing the checks paid by a credit union. These types of events are unfortunately all too common, and the fallout from them can impact a credit union and its members. This will be a high-level overview of the different considerations that may affect a credit union's options when it or one of its members becomes the victim of check fraud.

At the outset, note the requirements that govern this area are articles 3 and 4 of the Uniform Commercial Code (UCC) – state law rather than federal law. State law is usually beyond NAFCU's purview because of the complexity and variance in laws from state to state, so the credit union may wish to consult with local counsel when these types of issues arise.  For this reason, this article refers to the model UCC.