Our Operations area just asked me if there are any compliance issues surrounding a lockbox customer's request to stop procesing items to their account from now until 1/1/06. (I think they want to close out their books without any furhter deposits being credited for this year.)

Do we have any compliance issues with holding their deposits for the next three weeks? I'm not so concerned about their end - if we get their request in writing we have proof that we didn't delay deposits. My concern is on the processing end of the checks waiting to be processed: once we receive the items, are we under any obligation to process them or can we hold them?

Any guidance is appreciated!

I don't know anything about Lockbox Compliance issues (and I'm not ashamed to admit it). However, my first thought was - will they blame you if their customers get a late notice because their payment wasn't processed. (You know, the whole pass the buck thing...)

And have they thought about the risk they're taking that their customers will have spent the funds again by the time the checks are processed? We all know that people should subtract the money from their balance as soon as they write the check, but these days, it's amazing how many people (and not just 18-year-olds) think that the balance listed on their online banking is the amount they can still spend. Experience shows that the longer you hold a check the more likely you are to have it returned, whether for NSF, stop payment, Account Closed, or whatever.

Plus, what about those businesses that want to pay their bills by the end of this year? Although they're not your lockbox customer's is it fair to them?

The businesses show the bills as paid when they issue the check. It matters not when it clears.

I assume this is a small amount of money involved, because they will be overstating their receivables at year end, by carrying these items as unpaid. Items are supposed to be processed in the period received/paid.

Unless your arrangement extends beyond the traditional scope of lockbox services, and circumstances exist where the bank could be held liable for the accounting practices of the company, or; unless the request has raised a question of the company’s integrity or appears suspicious, you probably shouldn’t be too concerned in the reason for the request, even if their reason includes not giving their customer timely credit.

However, aside from the legal concerns you have already identified, this request also places the bank in the position of ensuring the physical items are properly controlled from the time they are received until processed. Therefore, before you comply, I would recommend that you consider these options:

1st - Offer to open a “holding” account to which you could go ahead and deposit the items as normal. This would allow them to avoid depositing the items into the general receivable account until a time of their choice without placing the burden of accountability for the physical items on the bank.

2nd - If they refuse this offer, I would inform them that during the time the service is ceased, they will be required to pick the items up from the bank the day received. This would provide the same protection as the first offer, but would be a “temporary” service halt that allows them to easily resume the service later;

3rd – Inform them that you will comply with their request of not depositing the items to their account, but that they will be deposited to an account under the banks control, with the agreement that the total balance will be transferred to the receivable account on the first business day in January or a day specified in writing by them. This option would provide some protection, but would still place the burden of accountability on the bank. Just not accountability and control over the physical items. And, you would also need to include a provision for return items; Or,

4th – Check your contract for all clauses and conditions regarding service termination to see if that is possible and employ option #2, and then require them to sign a new agreement when they are ready to resume. This is probably a last resort, but absent anything else, would possibly remove any contractual liability under the original agreement if the items are not deposited when received.

And last but not least, if you honor their request, I would also recommend the following: Since your liability is most likely contingent upon your adherence to the original written contract, I would at least require them to provide a written directive that clearly states their request that is signed by an employee authorized to make this decision. And, if you honor a temporary halt in the service, such as option 1-3, it should also state the time period to which it will apply and include a “hold-harmless agreement”. Further, to ensure enforceability if necessary, I would also suggest that you ask your legal counsel to review the amendment to ensure it provides adequate coverage.

As you can see, it is my opinion that you shouldn’t just stop a service temporarily when it is performed under a contractual arrangement. And, I don’t think you have any compliance related concerns but rather those of a legal nature, especially since you are dealing with a business customer and not a consumer.

I know this is a lengthy reply, but I hope that it helps!

I have been reading these posts wondering what was bothering me about them. I may have finally realized what it was. There could be a problem with what the company is proposing if the company has made a general pledge of its receivables to a lender. Delaying the payment application inflates the company's receivables, and it might therefore have a larger borrowing base at year end.

The company may have some perfectly innocent reason for making the request. But ask them about any asset-based borrowing before complying.