New Account Risks

Question: We have a branch that was approached by a company that wants to establish a depositor relationship with our financial institution. In doing research about this company I have discovered the following facts:

1) Two very large financial institutions have already decided to close several of this company's accounts due to a large volume of NSF checks.

2) There are numerous law suits against this company. I was able to obtain information about these law suits from a website they're involved with.

3) This company is a bail bonding company which deals with a lot of cash.

I am not getting any warm fuzzies with the information I have been able to dig up. However, management is seeing dollar signs in fees and balances with this customer. My concerns are at what point in time (if any) does the bank carry legal responsibility if they maintain an account that has a large volume of NSF's. Also, are there any risks that I am overlooking that give more punch to my argument to not open these accounts?

Answer: This problem crops up occasionally between security and management. We dealt with a similar illustration recently at a session where our advisor, banking attorney Mary Beth Guard, was answering questions.

A branch manager jokingly complained that a particular customer was the "best and worst customer I have - he's on the overdraft sheet every week." But when he got paid at the end of the month, he paid all the overdraft charges without a murmur. The manager wouldn't get rid of him because he was the "best moneymaker I have in the branch."

Mary Beth pointed out one of the greatest problems you could have with this method of handling of an account. When does it become a "loan" problem instead of paying overdrafts, if you are aware that it is repeated frequently? And what happens if you start bouncing checks that you normally or usually pay because you know the customer is good for the money at the end of the month?

If, somewhere down the line you decided NOT to pay the checks, and put the customer out of business, can he sue you? The answer was an obvious "Yes" he can, because you have not continued to do business as he depended on. Having prior knowledge that this customer uses the accounts in this manner puts you on notice of trouble. You definitely don't want to open or maintain such an account - even if it is a money-maker!

You have my sympathy. But you're correct - sometimes administration sees only the fees they'll make. You're going to hope it doesn't turn into a kite situation where you get left holding the short end. If possible, try to talk them into turning down the account, the reason being only, "We do not choose to do business with you." It's a perfectly legitimate reason.

Copyright © 2005 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 15, No. 11, 11/05