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Check Endorsements

Question: One of our officers attended your workshop in Philadelphia and came back and said we should stop checking endorsements on the checks that come in through the exchange. We have two people who do nothing but check endorsements, and we send them back if they are not endorsed, or if they are incorrectly endorsed. We find some every day that are not endorsed properly. Why would you say it is not necessary to check any endorsements?

Answer: I can't claim to have said it was not necessary to check any endorsements. Most financial institutions will examine endorsements on very large items. But the ones you really need to check are the ones that are accepted by your financial institution for negotiation of a check. Those endorsements should be closely examined by your tellers, whether those checks are drawn on you or on another bank. So if the check is accepted over your teller window, you need to carefully check the endorsement.

The reason being, of course, is that the payee on the check drawn on another bank is simply the first endorser. It may be even second or third endorsed. But when your bank stamp goes on the back of that check and it goes out to the drawee bank, you are the last and final endorser. That final endorsement says to the drawee bank, "We guarantee the funds from this check were paid properly to the payee." That guarantee is good for three years from the date of your bank's endorsement.

That's a "money-back" guarantee. We used to put "PEG" on the bank stamp - which stood for "Prior Endorsements Guaranteed". We don't do that any more because since Reg CC, the PEG is implied, and no longer necessary to be stated, as the guarantee rule is in the Uniform Commercial Code.

Checks come in to you for payment against your customer's accounts through the exchange. For sake of illustration, let's assume a check drawn on your bank is deposited in the Friendly National Bank and is sent through the work to you to charge your customer's account. It has no endorsement whatsoever on the back, except the stamp of the Friendly Bank.

"If a customer delivers an item to a depositary bank for collection:

1) the depositary bank becomes a holder of the item at the time it receives the item for collection if the customer at the time of delivery was a holder of the item, whether or not the customer indorses the item, and, if the bank satisfies the other requirements of Section 3-304, it is a holder in due course;

Friendly Bank took the check from its depositor, who was a holder in due course. Friendly, at that point became a holder in due course on the item. It credited its customer's account, and sent the check through the exchange to you.

and 2) the depositary bank warrants to collecting banks, the payor bank or other payor, and the drawer that the amount of the item was paid to the customer or deposited to the customer's account.

Friendly Bank, by placing its stamp on the back of the check guarantees the collecting bank, your bank, and your customer that the item was paid to the payee.

Suppose the check came through the exchange to you with NO endorsement on it, and you turned it around and sent it back to Friendly Bank through the return exchange for them to get it endorsed. This means they have to take the time to look it up, stamp it "...credited to the account of within named payee" and turn it around and send it back to you, delaying the completion of the transaction, which could create problems for both the drawer and the payee.

If they miss looking it up and simply charge it back to their customer, they'll probably charge them a fee for a returned item, and that's going to make their customer unhappy.

If you ignore the fact that it has no endorsement, and simply file it, what difference does it make? The guarantee on the back of the check from the depositary bank is still in effect for three years.

Suppose it has an endorsement, but it is a forged endorsement? You can't tell by examining the endorsement if it's genuine or not. Your customer may come back in a couple of months and says this check was never received by the payee, and the payee never got the funds from it. You obtain from the payee an affidavit attesting this fact, you send it back through the U.S. mail to the Friendly Bank and they have to pay your customer back. That's the purpose of the guarantee. That claim can be made for three years.

Standard of the industry on checking endorsements on large items that come in through the exchange varies depending on the market where your financial institution is located. Many small banks will examine checks of $5000 or more to be sure they are at least properly endorsed. Mega-banks may have a $50,000 cut-off. But people checking every endorsement on every check that comes through the exchange could be spending time doing something else more necessary.

Copyright © 2004 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 14, No. 8, 10/04

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