I have a situation where a full bank customer (deposit and loan) has deposited an insurance check made out to the bank and to the customer. The insurance check was to cover damages to the customer's residence. We have a mortgage on the residence (that is the reason the check was made to us and to the customer). The customer's loan officer wants to be able to control the disbursement of funds so she may ascertain that the repairs have been properly made (thus protecting our collateral). The loan officer wants to place an indefinite hold on the funds in the borrower's DDA until the repairs have been made. Is this permissible? I don't think that Reg CC allows this to happen. I think it would be best if the customer and lender opened an account specifically for the purposes of repairing the house with the proceeds check. The lender doesn't want to go to the time and expense of putting a new, small account on the system for a short period of time. Any suggestions? (Other than finding a non-compliance related job?) Thanks

Depending on the volume anticipated, why not cash the insurance check and issue a Cashier's Check to the bank (and customer if desired). This can be reduced as disbursements are made while issuing checks to the contractor for payment, the remainder in another Cashier's Check?

Thank you, again, Andy. At this rate you may have to claim me as a dependent on your tax return.

I'll suggest the cashier check idea to the lender. However, if the lender (a senior VP who was with the bank before I was born) doesn't want to go this route, is there anything else I can look for to facilitate the proper handling of this situation?

We've gone the Cashier's Check route because it preserves the bank's interest in the property and the repair process and provides customer service.

We need to ensure the property goes back to its original or better condition, that contractors and subs are paid and don't create liens later and that the customer is properly serviced and approves of the work.

Creating a DDA can do this for you as well, but seems to open the need for dual controls and auditing. But so long as your objectives are met, any safe and sound process will suffice.

When I do my taxes, I'll call for your NPPI.

Waaaaaaaay back in my beginning banking days, I remember a similar situation, and the loan officer held the check in the collateral file (less than six months) until the conditions for its release had been met.

However, that was when things were a little wilder and woolier than now. At a minimum, you would have to check the security agreement to make sure that the bank can take an extra measure like this to ensure its collateral condition. I'm sure others could think of other concerns - I'm just getting back into compliance mode after subbing for vacationing employees in other areas.

I don't know that a security agreement will address this.

The funds could go the Cashier's Check route or into a more time consuming and costly DDA account (which I don't believe is as efficient for a short term problem). What else would you do? You won't pay for work not yet completed, the funds won't be given to the customer, nor should the bank apply it against the loan and leave the property in a state of disrepair.

How do other banks handle this? (Admittedly my experience is mostly on consmer loans here which are easier to adminisiter. But if a check is issued jointly, the same principals apply.)

I think we have done a couple of different things, but in most cases we set up a savings account with the bank as escrow agent and control the disbursements that way - they bring us in the receipts and we disburse the funds - then the account gets closed out when the repairs are done. Not perfect but it works.

Opinions are mine and mine alone.