Question & Answer

Question: We are a very small bank and we're taking a look at the procedures we have in place. One of our new officers says that we are spending a lot of time reviewing endorsements on checks that we really don't have to do. Do we need to review the endorsement on any inclearing checks - that is those that are presented to us from other institutions or via the Federal Reserve Bank drawn on our customers' accounts?

Answer: No. The first endorsement on a check is that of the payee. Subsequent endorsements (second, third, etc.) can appear there. However, the LAST and FINAL endorsement on any check that is negotiated by you is your bank.

There is a stamp on the back of the check that used to read, "Prior Endorsements Guaranteed", or simply, "PEG" with the information of the bank number, etc. following. About ten years ago Fed declared it was no longer necessary to put PEG on the bank endorsement stamp, because it was already implied by the negotiation of the item by the depository bank and the requirements of the Uniform Commercial Code. As long as your bank stamp is on the back of the check, regardless of any other (or no other) endorsement, there is the endorsement guarantee by your bank, the depository bank, to the drawer and maker that the funds in the check went to the named payee.

Now turn it around. If you get a check drawn on one of your accounts negotiated by some other bank, the endorsement stamp of that bank on the back of the check guarantees your customer that the payee received the funds represented by the check. If the payee files an affidavit saying they never got any of the funds, the depository bank has to stand behind their guarantee.

Bottom line? There is no advantage whatsoever to you for you to review endorsements on items presented through the work against your customers' accounts. Your customers are supposed to do that. The endorsements that appear on the checks when they come in to you for payment are guaranteed by the depository bank for three years.

Checks drawn ON YOUR bank (official checks, cashier's checks, etc.) are a different matter. You'd want to check endorsements on those just as you do your own personal statement.

Copyright © 2000 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 10, No. 3, 3/00