People with Wet Feet Don't Make Good Decisions

The hurricane season is almost over. But that doesn't mean the financial storms have passed. Your worst problems may lie ahead if you are not careful. In the aftermath of Hurricanes Katrina and Rita, or any such disaster, there will be emotions melding with judgment decisions and sometimes errors will happen. You need to do what you can today to avoid problems that may not surface for a year or more. These are potentially big problems. Speaking with two Florida bankers who witnessed hurricane disasters, it was felt that losses immediately after the storm were much lower than anticipated. But the losses that follow by six months, a year, or more, are the ones to be afraid of.

When a disaster strikes emotional outpouring will occur. People will suffer many losses, at many levels. These people will be your customers and your employees. And their judgment may be clouded by their emotions. This can increase the chance of a mistake, a stretch to assist a customer, and a loss due to fraud or carelessness.

One way to avoid problems, meaning losses, is through preparation. Plan on the types of challenges your institution will be faced with and how to address them. When a disaster has struck so many homes, there will be large numbers of insurance checks issued and very often to multiple payees. Some of these items will be for large amounts. When the indorsements are not properly collected on these items, they may be returned to you for up to three years. (UCC Articles 3 and 4 are key references you should review for this.) In some cases there may well be multiple indorsements that must be collected to have a check properly paid.

Which indorsements are required depends on whom the check is payable to, and how they are listed.

"And" or "&" means all parties must indorse the item
"Or" means any of the parties may indorse the item
If it isn't specific, it is ambiguous and "Or" is the default.

If an insurance check is payable to the homeowner(s), a first lienholder and a second, in this form:

John and Jane Doe
XYZ Mortgage Company
123 Home Improvements Co.

this is ambiguous. However,

John and Jane Doe and
XYZ Mortgage Company and
123 Home Improvements Co.

is very clear that each party has some rights to the payment from this item. In this case, John, Jane, XYZ and 123 should each indorse the check for it to be properly paid. If one of the payees is now deceased, the check should be reissued.

When you are confronted with these items you want them processed quickly and correctly. Established procedures are necessary and you must decide how much you want to assist your existing or new customer. Recommendations from bankers I spoke with are that you want to jump through whatever hoops are necessary to assist whether your institution is one of the payees or not. In addition to providing optimal customer service, these checks may cause growth in your deposits short and long term. Here are some recommendations.

1) Copy your indorsement requirements and make them available to customers as they enter your branch. They really don't want to wait 30 minutes or more at a busy branch only to be told they need to go and collect signatures before you'll accept an item. Here is some sample wording that can get you started (tweak as needed to conform to your policy.)

Cashing Insurance Checks We will gladly cash insurance claim checks if they are payable only to an individual with a ____________ Bank deposit account, or payable jointly to individuals who hold a joint account with us in the same names. We require the personal indorsements of the payee(s), and that all payees are present to cash the check.

Please don't ask us to cash insurance claim checks payable to other than individuals who are our depositors, or checks payable jointly to an individual and a lien holder or mortgagee.

Depositing Insurance Checks If your insurance claim check lists a current or former lien holder or mortgagee, you will have to obtain the indorsement of the lien holder or mortgagee before bringing the check to us for deposit. If your loan or other obligation is already paid off, you should have no problem getting that indorsement. If there is a balance remaining, your lien holder or mortgagee may want to be sure that your obligation is current or will be paid off, or that you've made arrangements for repair of the damage.

We can help you obtain the required indorsements. Please speak to one of our representatives for assistance.

Other cases If your insurance check doesn't fit either of the descriptions above, or you are unsure how to cash or deposit your insurance claim check, please speak to one of our representatives.

2) When customers have multiple-payee checks, they may not know how to begin contacting the other payees for indorsements. Decide how much assistance you are able to provide. This could be anything between providing them with contact information, to the recommended legwork you will provide of searching the web, using the telephone, overnight delivery and even a bank vehicle to get the indorsements.

Some web sites contain contact information for indorsements or at least a main telephone number to start your query. If the company is a good distance from you, it may be best to first speak with someone and then overnight the item to them for signature and ask for return through overnight delivery.

If the company is local, consider driving the check to them for signature.

Ensure that they will indorse and return the item. If they want the customer to indorse it first so they can hold the funds or apply them against a debt, let the customer work this out with them in advance.

Ensure that each payee properly indorses the item. A junior lienholder may indorse the item and allow the first lienholder to administer any account established with the funds to repair the property.

3) Consider establishing a floor amount at which you'll accept the items indorsed at face value, without verifying company indorsements.

4) Explain to your borrower customers what process you will go through with their checks in order for them to use the funds.

• Will the funds have to be applied against a loan?
• Will loans with payoffs less than the check amount have to be paid in full?
• Will funds be placed in an escrow or construction account to be drawn on for the rebuilding?
• Who administers the account, and does it earn interest?
• What are the current debt service requirements while the property is being rebuilt?

5) Insurance companies may hold to the exact letter of their policies when they are hit with large policy claims. There may be no room for error. And smaller insurance companies could be forced out of business by excessive claims. When it comes to your paying out funds from insurance checks, trust but verify.

6) Remember that some customers may cash out equity in these situations. If the insurance check is for more than the payoff, customers may decide they no longer want the property, especially if it was not their principal dwelling. They'll raze the structure, sell the land and pocket sale proceeds and the excess from the insurance.

7) Warn your customers that fraudsters come out after a disaster. Contractors may tell them that there is a long line of homes to be repaired. This is likely true. But when they tell them that for cash up front they can get their property repaired sooner, the red flags are raised. These contractor/fraudsters have been known to take the money and run. One I heard about in Florida collected $40,000 from an owner and promptly left town.

Remember that when people have been through a disaster that took the life of a loved one or a neighbor, and destroyed property and memories, they may be in a state of shock. They need clear-headed and knowledgeable assistance. In addition to just doing the right thing and serving your community, your loyalty and kindness can help grow your bank with customers who will forever remember how you helped them in their time of need. But your assistance should not be at the expense of returned items long after the funds were spent. Protect your institution and serve your customers.

RETURN TO BOL's Disaster Recovery Center


First published on BankersOnline.com 10/17/05.