CBT Negotiable Instruments and Check Processing 3 — Questions and Answers
Question 1: What information is required on a check for it to be considered a valid negotiable instrument under the UCC?
- Payee name, amount in numbers only, and a stamp of authenticity
- Unconditional order to pay, specific dollar amount, and maker's signature (Correct answer)
- Account number, routing number, and payee address
- Bank seal, teller initials, and issue date
Correct 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).
Question 2: A 'substitute check' created under Check 21 must contain which statement?
- 'This check has been processed electronically'
- 'This is a legal copy of your check. You can use it the same way you would use the original check.' (Correct answer)
- 'Original check has been destroyed per federal regulations'
- 'Funds guaranteed by the issuing financial institution'
Correct 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.
Question 3: When a customer presents a third-party check (made out to someone else and signed over), what should a teller do first?
- Refuse to accept it under all circumstances
- Verify the endorsement and follow bank policy for third-party checks (Correct answer)
- Accept it without question if the customer has an account
- Call the police to verify the transfer
Correct 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.
Question 4: What is 'check kiting'?
- Writing a check in a foreign currency
- Exploiting the float between two accounts to fraudulently inflate balances (Correct answer)
- Depositing a check and withdrawing cash simultaneously
- Accepting a check with an altered payee name
Correct 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.
Question 5: Which endorsement allows a payee to sign a check over to a third party?
- Blank endorsement
- Restrictive endorsement
- Special (full) endorsement (Correct answer)
- Qualified endorsement
Correct 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.
Question 6: If a customer's check is returned marked 'Account Closed,' what does this mean?
- The account had insufficient funds at the time of processing
- The account on which the check was drawn no longer exists (Correct answer)
- The check signature did not match bank records
- The check exceeded the daily withdrawal limit
Correct 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.
CBT Negotiable Instruments and Check Processing 3
What information is required on a check for it to be considered a valid negotiable instrument under the UCC?