Is there any kind of compliance issue (or legal if you know it) that prohibits a bank from allowing a borrower to use access checks for their LOC with our bank to make the payment on that LOC?

Naturally, we don't want people to do this, but have learned that it is happening & want to make sure we aren't going to get into trouble for allowing it.

I'm not aware of any federal laws preventing it. That being said, you may want to review and monitor those relationships to ensure that you don't have a potential past due issue that is being disguised/postponed right now.

I'm in Oklahoma and we provide this service to customers. We require the customer to sign an agreement stating the purpose of the loan. Any check presented for payment that does not fall under the parameters of that agreement can be returned unpaid. We monitor those loan "advances" daily.

The amount of time for the monitoring vs. the amount of time used up by a Loan Secretary taking the advance request via telephone plus processing the same advances manually was a huge savings for said loan secretaries.

I'm in Oklahoma and we provide this service to customers. We require the customer to sign an agreement stating the purpose of the loan. Any check presented for payment that does not fall under the parameters of that agreement can be returned unpaid. We monitor those loan "advances" daily.

The amount of time for the monitoring vs. the amount of time used up by a Loan Secretary taking the advance request via telephone plus processing the same advances manually was a huge savings for said loan secretaries.

Your agreement should prohibit this practice - I would start there. These loans, if found by the regulators, are going to be treated harshly for a S&S standpoint.

We've been examined many, many times since we put this into place in the mid-90s. Our semi-annual loan reviews are conducted externally by a company of ex-examiners who find no problem with this. The agreement was created by lawyers well versed in lending. It's just a way to facilitate advances.

FWIW, I agree with Randy. What the customer is doing is making an advance on a loan (no matter what the medium) to make a payment on the same loan. To me, that is no different than capitalizing the interest every time it comes due. If they don't have other resources to make the scheduled payment when it is due, a downgrade should be considered.

I don't agree. So instead I could deposit the advance check in my account at another bank and write you a different check for the monthly interest payment, where you don't know what, when, where or why?

In the spirit of discussion I would like to add that operating monies are just that. For operating. They allow customers to operate during times of cyclical income periods. That customer is underwritten and approved for that loan and purpose. Perhaps it is a loan supported on a monthly borrowing base? I have a customer that shows 35% loan to value on accounts and inventory and advances to pay interest while waiting on invoices to be paid? Is that bad? No - that's why you gave the customer the loan - cyclical income periods during purchases and sales of inventories and collection of said sales.

Many Hats,

... I feel like I'm talking to an Indian in a 1950's western ...

Many Hats,

Can you clarify: Are you talking about a consumer using checks on a HELOC to make payments on that same HELOC?

I think Okie's example is for a business, correct?

And, while I've seen this practice in action, I understand Randy's comments. In this part of the world, you sometimes see businesses need a working capital line to survive the "off season" and they might use the line to pay interest on loans. But they do so by depositing the advance and then writing the check, not debiting and crediting the loan a single check. But this is temporary. What if they are doing this as a pattern of being unable to service their debt load? That is what Randy is getting at by suggesting it is a safety and soundness problem. When people are using lines to pay loans because cashflow has dried up and they have no option, not when it is an anticipated seasonal issue.

Sorry for such a late reply, but yes...I was referring to a HELOC customer using their HELOC access checks to make a payment on their HELOC. It was during an exam that this was discovered, so that was real pleasant.