BWM C.S.H.B. 2902 75(R)BILL ANALYSIS FINANCIAL INSTITUTIONS C.S.H.B. 2902 By: Gutierrez 4-11-97 Committee Report (Substituted) BACKGROUND Demand drafts are being used by merchants, telemarketers, and out-of-state collection agencies as a way of directly debiting a customer's bank account without the customer writing a check. In many cases, these drafts are not authorized by the customer. Because of the volume of items presented to banks each day for collection, banks cannot determine whether the customer authorized the draft on his or her account. As a result, the bank typically pays these drafts in the normal course of business. If the customer notifies the bank that the draft was not authorized, the bank must reimburse the customer. The bank does not, however, have an effective way of recovering the loss from the originator of the draft. This bill would allow a bank that pays an unauthorized demand draft to return it to the originating bank or other financial institution for restitution. The bank that originates the drafts for its customer, the merchant, telemarketer, or collection agency, is in the best position to know whether the drafts are authorized or not. In addition, the originating bank can, by contract, shift any liability it might have for unauthorized drafts back to its customer. PURPOSE As proposed, H.B. 2902 amends the Texas Uniform Commercial Code to impose statutory warranties on the transferors of unsigned, unauthorized demand drafts. The bill shifts the risk from the customer's bank to the institution having the deposit relationship with the telemarketer or merchant initiating the draft. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Section 3.103(b), Business and Commerce Code. Subsection (b) Adds "demand draft" to list of definitions applying to this chapter. SECTION 2. Amends Section 3.104, Business and Commerce Code, by adding Subsection (k). Subsection (k) Defines "demand draft." SECTION 3. Amends Section 3.416, Subsection (a), Business and Commerce Code, and adds Subsection (e). Subsection (a)(6). States the instrument according to the terms on its face was authorized by the person identified as drawer. Subsection (e). States that if the warranty under Subsection (a)(6) is not given by a transferor under applicable conflict of law rules, the warranty is not given to that transferor when that transferor is a transferee. SECTION 4. Amends Section 3.417, Subsection (a), Business and Commerce Code, and adds Subsection (g) to read as follows: Subsection (a)(4). States if the instrument is a demand draft, the creation of the draft according to the terms on its face was authorized by the person identified as drawer. Subsection (g). States that if the warranty under Subsection (a)(4) is not given by a transferror under applicable conflict of law rules, the warranty is not given to that transferor when that transferor is a transferee. SECTION 5. Amends Section 4.207, Subsection (a), Business and Commerce Code, and adds Subsection (f) to read as follows: Subsection (a)(6). States if the item is a demand draft, the creation of the item according to the terms on its face was authorized by the person identified as drawer. Subsection (f). States that if the warranty under Subsection (a)(6) is not given by a transfer or collecting bank under applicable conflict of law rules, the warranty is not given to that transferor when that transferor is a transferee or to any prior collecting bank of that transferee. SECTION 6. Amends Section 4.208, Subsection (a), Business and Commerce Code, and adds Subsection (g) to read as follows: Subsection (a)(4) States if the instrument is a demand draft, the creation of the draft according to the terms on its face was authorized by the person identified as drawer. Subsection (g) States that if the warranty under Subsection (a)(4) is not given by a transferror under applicable conflict of law rules, the warranty is not given to that transferor when that transferor is a transferee. SECTION 7. Effective date: September 1, 1997. SECTION 8. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The Committee Substitute to HB 2902 adds the words "Signature on file" to the allowable statements on a demand draft as provided in SECTION 2, Section 3.104(k)(3) of the bill. Furthermore, Subsection (g) is removed from SECTION's 4 and 6 of the bill and all following subsections are renumbered accordingly.